Question

1. A business purchased a machine for $60,000. The machine is expected to be used for 8 years, after which it is expected to be sold for $6,000. Using the straight-line depreciation method, how much is the annual depreciation amount?

2. An entity’s financial year ends on 31 December. On 1 October it pays a 24-month magazine subscription of $600. Under the accrual system of accounting how much of the subscription will be recognized as an expense for the current year ended 31 December, and how much will be treated as an asset (prepaid subscription)?

Answer 1

Question 1

Using Straight Line Method

Annual Amount of Depreciation = Cost of Machine - Salvage Value of Machine / Useful Life in Years

Cost of Machine = $ 60,000

Salvage Value of Machine = $ 6,000

Useful Life in Years = 8 Years

Annual Amount of Depreciation = (60,000 - 6,000) / 8

Annual Amount of Depreciation = 54,000 / 8

Annual Amount of Depreciation = 6,750 per Year

Question 2

Using Accrual Accounting

Amount of Subscription per Month = Amount Paid for Magazine / Total Months for Subscription

Amount paid for Magazine Subscription = $ 600

Total Months for Subscription = 24 Months

Amount of Subscription per Month = 600 / 24

Amount of Subscription per Month = $ 25

Between Oct 01 and Dec 31 there are three months for which subscription has been used for

Amount of Subscription Expense for 01 Oct to 31 Dec = 3 Months * Amount of Subscription per Month

= 25 * 3

Amount of Subscription Expense for the period of Oct 01 to Dec 31 = $ 75

Amount of Prepaid Subscription on Dec 31 = Amount paid for Subscription - Amount of Subscription Expense for Oct 01 to Dec 31

= 600 - 75

Amount of Prepaid Subscription to be reported as Current Assets on Dec 31 = $ 525