Question

7. On 1 July, 20X1, Sound Productions purchased new machinery at a cost of $600,000. Useful life of the machinery was estimated to be four years, and its estimated residual value $60,000. The company expected to produce 540,000 CDs in the four year period.

Required:

(a) Calculate the depreciation expense for each year of the machine’s useful life according to each of the following depreciation methods. Assume a 30 June year-end. (Show all workings)

(i) Straight-line;

(ii) Reducing balance (use a rate of 45 %); and

(iii) Units of production. (Assume actual number of CDs produced for 20X2 – 20X5 were 140,000; 135,000; 155,000 and 110,000 respectively)

(b) Assuming the straight-line method was adopted and the machine was sold on 30 June 20X3 for $460,000 show the journal entry to record the sale. (Explanation not required)

(c) Should depreciation be recorded on a non-current asset in a year in which the market value of the asset has increased? Discuss.

(d) During the life of an asset two types of subsequent expenditure may be incurred: revenue expenditure and/or capital expenditure. Explain the accounting treatment of these expenditures.

(e) Each of the following items describes an accounting concept or principle. For each, indicate the applicable concept or principle.

(i) an accounting concept that may justify departures from other accounting principles for reasons of convenience, especially when the dollar amounts involved are insignificant.

(ii) the principle of using the same accounting methods from one accounting period to the next.

(iii) a principle which would be inappropriate for a firm undergoing bankruptcy.

(iv) the principle that determines in which accounting period (or periods) a cost should be recognised as expense.

Answer 1