CONTEXT

The demand of stringing services declined significantly since the outbreak of COVID-19."

Option 1: making no change to Original Practice depreciation method but re-evaluating the remaining useful life of each machine

Option 2: changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method

Original Practice: recognise depreciation using the straight-line method

Table 1. Depreciation table for 3 stringing machines

QUESTION

Discuss how may Option 2 be more appropriate than both Option 1 and the Original Practice (i.e. to recognise depreciation using the straight-line method based on the information in Table 1) :

a) the reasons why the Option 1 and the Original Practice may not be appropriate

b) the reasons why Option 2 may be more appropriate

Asset Asset 1 Asset 2 Asset 3 Date of acquisition 1/7/2019 1/1/2019 15/01/2021 Useful life in years 3 6 4 Cost $3,800 $5,200 $800 Residual value $200 $400 0 Expected total production 7,200 8,000 3,200 Production in January 2021 50 85 0 Depreciable amount $3,600 $4,800 $800 Annual depreciation under straight line method $1,200 $800 $200 Useful life consumed in years as at 31/12/2020 1.5 2 nil Accumulated depreciation as at 31/12/2020 $1,800 $1,600 nil Depreciation expense for the month January 2021 $100.00 $ 66.67 $ 8.33 [For Asset 3 = Assets used 15 days = 0.50 months] (200*0.5/12) Depreciation expense per unit of production $ 0.50 $ 0.60 $ 0.25 Depreciation expense for the month January 2021 $ 25.00 $ 51.00 $ ( the unit-of-production depreciation method)