1. A major item of plant that cost $20 million to purchase and install on 1 January 2017 is being

depreciated on a straight-line basis over a five-year period (assuming no residual value). At the beginning of the current year (1 January 2019) the production manager believed that the plant was likely to last eight years in total (i.e. from the date of its purchase). The assistant accountant has calculated that, based on an eight-year life (and no residual value) the accumulated depreciation of the plant at 31 December 2019 would be $7.5 million ($20 million / 8 years 3).

In the financial statements for the year ended 31 December 2019, the accumulated depreciation was $12 million ($20 million / 5 years 3). Therefore, by adopting an eight-year life, Baxton can avoid a depreciation charge in the current year and instead credit $ 4.5 million ($12 million $7.5 million) to profit or loss in the current year to improve the reported profit.

2. Most of Baxton's competitors value their inventory using the Weighted Average Cost (WAC) basis, whereas Baxton uses the first in first out (FIFO) basis. The value of Baxton 's inventory at 31 December 2019 (on the FIFO basis) is $20 million, however on the WAC basis it would be valued at $18 million. By adopting the same WAC method as its competitors, the assistant accountant says the company would improve its profit for the year ended 31 December 2019 by $2 million. Baxton 's inventory at 31 December 2018 was reported as $15 million, however on the WAC basis it would have been reported as $13.4 million. )\