Question

Q10: Gulf Agrotech Ltd. purchases a machinery which costs RO 40,000. The useful life of the machine is 6 years and the annual rate of depreciation is 10% per annum, depreciation being calculated on diminishing balance method (WDV). After 6 years, company decided to buy the new advanced machine for RO 60,000. The machine supplier agrees to buy the old machine at the scrap value.

a) How much amount Gulf Agrotech needs to pay to buy the new machine in exchange of the old machine scrap?   

b) Depreciation is an expense for the business organization. Discuss with reasons   

Answer 1

(Machinery Account)

Date	Particulars	Amount	Date	Particulars	Amount
1st year	Bank	40,000		Depriciation	4,000
				Balance c/d	36,000
		40,000			40,000
2nd year	Balance b/d	36,000		Depriciation	3600
				Balance c/d	32,400
		36,000			36,000
3rd year	Balance b/d	32,400		Depriciation	3,240
				Balance c/d	29,160
		32,400			32,400
4th year	Balance b/d	29,160		Depriciation	2,916
				Balance b/d	26,244
		29,160			29,160
5th year	Balance b/d	26,244		Depriciation	2,624
				Balance b/d	23,620
		26,244			26,244
6th year	Balance b/d	23,620		Depriciation	2,362
				Balance b/d(scrap value)	21,258
		23,620			23,620

Total Depriciation=4000+3600+3240+2916+2624+2362

=18,742

Scrap Value= Total cost of machine- depriciation

=40,000 - 18,742

= 21,258

For purchasing of new machine gulf agrotech wiil pay to supplier 38,742 rest amount after deducting scrap value from the cost of new machines that is:- 60,000 -21,258 = 38742

B.  Depriciation is an expense for the busineses , to understand this fact we need to understand first what depriciation is? so depriciation is the gradual and permannet decrease in the value of an asset. Due to the constant use of fixed assets in business operations wear and tear arise in them which result in the reduction in their values, once the value of an asset is reduced due to any depriciation, it cannot be restored to its original cost. So it essestial to anticipate a certain amount of deprication that has having diminution in the quality, quantity or the value of assets.