Question

Suppose you have organized a pharmaceutical unit under the name “Heal Pharmaceutical” to develop and manufacture COVID 19 vaccine on December 1, 2019. In order to strengthen your operations, you have purchased following machine and furniture:

1. Purchased a complete set of capsule manufacturing machine on December 1, 2019 having cost $5,750,000 with residual value of $475,000 and estimated useful life of 7 years.

2. Purchased furniture of $799,000 on December 15, 2019 with residual value of $75,000 and estimated useful life of 5 years

Instructions:

4. Prepare depreciation schedule of capsule manufacturing machine by straight-line method (half year convention).

5. What will be the book value of capsule manufacturing machine after completion of its useful life?

Please work step by step in details part d and e of the question

Answer 1

in the half year convention method of depreciation, The depreciation for half year is charged on assets in the year in which asset is purchase and remaining half year depreciation will be charged,immediatly after the estimated life of assets.

Calculation of annual depreciation on 31, december,2019

Machine =( 5,750,000 - 475,000)/7 = 753,571.43

Furniture = (799,000 - 75,000)/5 = 144,800

Depreciation under half year convention method

Machine = 753,571.43/2 = $376,786

Furniture = 144,800/2 = $ 72,400

(b).. Calculation of book value of assets

Book value = Cost - Depreciation

Machine BV = 5,750,000 - 376,786 = $5,373,214

Furniture BV = 799,000 - 72,400 = $726,600