Question

QUESTION 2

Fleet Rentals purchased equipment with a cost of RM200,000 at the beginning of 2019. The equipment has an estimated life of 10 years or 100,000 units of product. The estimated residual value is RM20,000. During 2019, 11,000 units of product were produced with this machinery.

1. Explain the relationship between the book value of a plant asset, the market value of the plant asset and the residual value of a plant asset?

2. Amount of total accumulated depreciation at December 31, 2019, using units-of-production depreciation)   

3. Book value at the end of 2019 using straight-line depreciation.

4. Why would the company choose units-of-production depreciation instead of straight-line?

                            

5. State the accounting concept involved in providing depreciation on non-current assets.

Answer 1

1) Book value of plant assets = original cost of plant assets - Accumulated depreciation

Market value of plant asset is the realizable value of the asset , if it has been sold in the market.

After the expiry of whole life span of the assets, Expected realizable value of assets is called residual value.

If the book value of asset or residual value of asset  is higher than original market value of the asset , then it constitute loss on disposal . If book value of asset is lower than market price ,then it constitute gain on disposal of assets .

Book value or residual value - Market value = Loss on disposal of assets

Similarly, Market value - Book value or residual value = Gain on disposal of assets

2) depreciation expense for 2019 under unit of production method

Depreciation expense = [ {Cost of asset - residual value } / Estimated total units to be produced over estimated useful life ] X Actual units produced

Depreciation expenses = [ {RM 200,000 - RM 20,000 } / 100,000 ] X 11,000 = RM19,800

Accumulated depreciation on December 31,2019 = RM 19,800

3) Annual depreciation expense under straight line method = [ Original cost + Installation charges - Scrap value ] / Number of working life in years

Annual depreciation expense = [ RM 200,000 + RM 0 - RM 20,000 ] / 10 = $ 18,000

Book value at the end of 2019 = Original cost of equipment - Accumulated depreciation = RM 200,000 - RM 18,000 = RM 182,000

4) Units of production method would be chosen over straight line method of depreciation to predict how often an asset will be used for production to estimate how quickly it will depreciate. This method also helps to track the usage of the assets.

5) Matching principle. As per the matching principle the whole cost of the asset never been considered as an expense during the date of purchase . Rather Total cost of asset is divided to the whole life span of the assets as depreciation expense.