Question

Young Concrete Ltd purchased equipment on 1 January 2017 for $132,000. The expected life of the equipment is 10 years, or 150,000 units of production, and its residual value is $12,000. The equipment produces 8,000 units and 13,000 units in years 2017 and 2018 respectively. Under three depreciation methods, the annual depreciation expense and the balance of accumulated depreciation at the end of 2017 and 2018 are as follows:

	Method A		Method B		Method C
Year	Annual depreciation expense	Accumulated depreciation expense	Annual depreciation expense	Accumulated depreciation expense	Annual depreciation expense	Accumulated depreciation expense
2017	12,000	12,000	6,400	6,400	28,116	28,116
2018	12,000	24,000	10,400	16,800	22,128	50,244

Identify from the three major methods the depreciation method used in each instance, and show how the annual depreciation has been calculated (Rounded to the nearest dollar/ showing full workings).

Assume continued use of the same method in 2019. Determine the annual depreciation expense, accumulated depreciation and carrying amount of the equipment for 2019 under each method, assuming 10,000 units of production in 2019.

Depreciation is a concept used in accrual accounting. Of the depreciation methods above discuss the reasons for selecting one alternative method of depreciation over another as dictated by accrual accounting and the matching principle. (60 words limit)

The carrying amount of a fixed asset (Cost less accumulated depreciation) measures the market value of the asset. Discuss stating whether you agree or disagree with the statement and why? (40 words limit)

With reference to the equipment purchased by Concrete Ltd above assuming the equipment was sold at the end of 2018 for $98000 cash describe the impact of such a sale on the accounting equation A= L+OE (NOTE: assume the asset is depreciated under the straight line method of depreciation)

Answer 1

Value of asset ($)	132000
Expected Life ( Years)	10
Salvage value/residual value	12000
Total expected production	150000
Method A ( Straight Line)		Year 1 - 2017	Year 2 - 2018	Year 3- 2019
Depreciation Expense		12000	12000	12000
		(132000-12000)/10	(132000-12000)/10	(132000-12000)/10
Method B ( Units of Production)
Depreciation Expense		6400	10400	8000
		(132000-12000)/150000*8000	(132000-12000)/150000*13000	(132000-12000)/150000*10000
Method C ( Declining Method)
Depreciation Expense		28116	22127	17,414
		((100%/10)*2.130)*132000	(132000-28116)*21.3%	(132000-28116-22127)*21.3%
Equipment sold for 98000 at the end of 2018
Net Book value of the asset	108,000
Sales Realisation	98,000
Loss on sale of assets	10,000
Total Assets will be less by $ 10,000
Owners Equity will also be reduced by $10,000 on account of loss on sale of Euipment

Unit of production method of depreciation is most suitable since depreciation is allocated based on units produced rather than based on wear and tear, it is most accurate in matching the expenses to the revenue generated from using the equioment.