Question

XYZ Pty Ltd acquired a machine for $400,000 on 1 September 2017. The machine has an estimated useful life of 5 years. The machine was sold on 1 May 2020 for $150,000.

Required: A. Prepare the depreciation schedule using the prime cost method

B. Prepare the depreciation schedule using the diminishing value method

C. Calculate the assessable or deductible balancing adjustment under the prime cost method

D. Calculate the assessable or deductible balance adjustment under the diminishing value method.

Answer 1

A) Depreciation Schedule Under Prime Cost method:

		$
Cost of machine		4,00,000
Useful Life		5 years
Accumulated Depreciation:
Depreciation for Sep 2017 to 2018 (4,00,000/5)	80,000
Depreciation for sep 2018 to sep 2019 (4,00,000/5)	80,000
Depreciation for sep 2019 to May2020 {(4,00,000/5)*8/12}	53,333	2,13,333
Depreciated Value		1,86,667

Prime Cost Method is nothing but the straight line method of Depreciation. Under this method the asset is said to be depreciating at equal rate during its life time. so, the depreciation amount will be equal during the life of the asset. here during sep 2017 to 2018 and sep 2018 to 2019 the depreciation is calculated by dividing the original cost of the asset divided by no. of years of useful life. and the asset is sold in may 2020 so the asset is held for only 8 months so the calculated depreciation is adjusted for 8 months by multipling the depreciation amount by multipling 8/12.

The depreciated Value under Prime Cost Method is $186,667.

B) Depreciation Schedule Under Diminishing Value method:

Under this method the asset is said to be depreciating at same percentage on diminihed value of the asset. that for second year depreciation you apply the depreciation percentage on the cost - depreciation of first year and so on. so lets calculate the rate of Depreciation is calculated first.

Cost of the asset = 400,000 and Useful life is 5 years.

The First year Depreciation is 400,000/5 = $80,000

Depreciation Percentage is = 80,000/400,000*100 = 20%

		$
Cost of machine		4,00,000
Useful Life		5 years
Accumulated Depreciation:
Depreciation for Sep 2017 to 2018 (4,00,000*20%)	80,000
Depreciation for sep 2018 to sep 2019 (320,000*20%)	64,000
Depreciation for sep 2019 to May2020 (256,000*20%*8/12)	34,133	1,78,133
Depreciated Value		2,21,867

the asset is sold in may 2020 so the asset is held for only 8 months so the calculated depreciation is adjusted for 8 months by multipling the depreciation amount by multipling 8/12.

The depreciated Value under Prime Cost Method is $221,867.

C) Assessable or Deductible Balance adjustment under Prime Cost Method:

	$
Depreciated Value	1,86,667
Selling Price	1,50,000
Deductible Balance Adjustment	36,667

If the Selling Price of the asset is More than the Depreciated Value then it is called Assessable Balance Adjustment and If the Selling Price of the asset is less than the Depreciated Value then it is called Deductible Balance Adjustment.

Here Selling price is less than the Depreciated Value so the Deductible Balance Adjustment is $36,667.

D) Assessable or Deductible Balance adjustment under Diminshing Value Method:

	$
Depreciated Value	2,21,867
Selling Price	1,50,000
Deductible Balance Adjustment	71,867

If the Selling Price of the asset is More than the Depreciated Value then it is called Assessable Balance Adjustment and If the Selling Price of the asset is less than the Depreciated Value then it is called Deductible Balance Adjustment.

Here Selling price is less than the Depreciated Value so the Deductible Balance Adjustment is $71,867.