Question

Question 2

KOL Limited purchased a machine on 1 January 2018 at $500,000. It has an expected useful life of 5 years and an estimated salvage value of $50,000. It is also expected that the machine can run for 30,000 hours. For the year ended 31 December 2018, KOL has used the machine for 4,000 hours.

KOL has another equipment with the following data on 31 December 2018.

Cost $260,000

Carrying amount $200,000

Fair value less costs to sell $180,000

Value-in-use $175,000

KOL has a shop in which it carries out retail business. In the year ended 31 December 2018, it had a sale of $79,644 and net income of $5,584. The carrying amount of the shop on 31 December 2018 was $125,717.

Required:

a. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using straight-line method.

b. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using activity-based method.

c. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using double declining-balance method.

d. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using sum-of-the-years’-digits method.

e. Discuss when a company should perform an impairment review for a long-lived tangible asset, and when it is impaired.

f. Determine the impairment loss for the equipment on 31 December 2018

g. Compute the asset turnover for the shop.

h. Compute the profit margin on sales for the shop.

i. Compute the return on assets for the shop.

Answer 1

a) $90000

Solution :

Depreciation expense under straight line method = (cost - salvage value) /useful life.

Depreciation expense for the year ended 31 Dec, 2018 = ($500000 - $50000)/5 years

= $450000/5 years.

= $90000 per year

Therefore, depreciation expense for year ended 31 Dec 2018 = $90000.

b) $60000

Solution :

Depreciation expense under activity based method = depreciation per unit of usage × total units of usage for the year.

Where, depreciation per unit of usage = total depreciable value/total units of usage for useful life.

Depreciation expense for year ended 31 December 2018 = $15×4000 = $60000

Where,

Depreciation per unit = ($500000 - $50000)/30000 hours  

= $450000/30000 hours

= $15 per hour.

c) $180000

Solution :

Depreciation expense under double declining balance method = cost × depreciation rate.

Where,

Depreciation rate = depreciation rate under straight line method × 2

= ($90000/$500000)×2

= 0.18×2

= 0.36

That means 36%

Depreciation expense for year ended 31 Dec 2018 = $500000×36%

= $180000

d) $150000

Solution :

Depreciation expense under sum of digits method = deprecaible value ×( respective year digit /sum of digits of years)

Depreciation for year ended 31 Dec 2018 = ($500000-$50000)×(5/15)

= $450000×0.3333

= $150000

Where, sum of digits of years = 5 + 4 +3 +2 + 1 = 15