ACC102: Fundamentals Of Accounting- Perpetual Inventor Y System with Returns- Depreciation Of Machinery - Assessment Answer

Fundamentals Of Accounting Assignment

Assignment Task

Introduction

Answer to Question 2 Part B

Report on Depreciation Method

The depreciation has been computed using four methods. Each of them has been analyzed hereunder:

• Straight Line Method: In this method of computation of depreciation the asset is depreciated equally over the lifespan of the asset. This method is easy to calculate. However, since equal amount of depreciation is accounted over the lifespan it does not take into account time value of money.
• Diminishing Balance Method: In this method of depreciation, the depreciation is computed on the basis of fixed percentage which is applied on the carrying value of the asset. In this more amount of depreciation is accounted in initial years and lesser amount in the subsequent years.
• Sum of Year Digit Method: Weights are allotted in this method for charging depreciation. Highest weight is given to the initial year while lowest weight is provided to the last year. Therefore, greater amount of depreciation is provided in initial years.
• Units of Production Method: Depreciation is provided for in this method by considering the units that have been produced in the current year in proportion to the units of production that is expected over the lifespan of the asset.

As per IAS 16 the asset is initially recognized at cost while the subsequent realization would be at cost or NRV where the NRV of the asset can be reasonably measured.

The asset should be depreciated over a systematic basis where the cost and residual value is allotted on a systematic basis. The residual value and the useful life should be reviewed at the end of each financial year. Depreciation should reflect the pattern in which the economic benefits have been consumed by the entity.

Therefore, keeping in mind the above principle the units of production method is ideal in the given case since the asset is depreciated in this case on the basis of units of production that are produced in each year.The annual cost of operating the machinery has been explained hereunder: