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Q10: Gulf Agrotech Ltd. purchases a machinery which costs RO 40,000. The useful life of the...

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   

Solutions

Expert Solution

(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.


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