Depreciation of Machines & Vehicle

As at 31 January 2021, Ash & John had three stringing machines. Details of these assets are presented in Exhibit 1 below.

Exhibit 1

	Machine 1	Machine 2	Machine 3
Date of acquisition	1 July 2019	1 January 2019	15 January 2021
Useful life in years	3	6	4
Cost	$3,800	$5,200	$800
Residual value	$200	$400	nil
Expected total production*	7,200	8,000	3,200
Production in January 2021**	50	85	0

* Total number of stringing services expected to be performed between the date of acquisition and the end of useful life.

* Total number of stringing services performed in the month.

The demand of stringing services declined significantly since the outbreak of COVID-19. As a result, Ash & John was considering the following options: (1) changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method, or (2) making no change to the depreciation method but re-evaluating the remaining useful life of each machine.

Ash & John also owns a delivery van that is used to deliver shipment and transport the stringing machines to customer sites for on-site service provision. The van was given to the business by Mrs Stosur on 1 July 2018 with an estimated useful life of 10 years and a residual value of $9,000. Depreciation of this vehicle is recognised using the straight-line depreciation method.

The case states that The demand of stringing services declined significantly since the outbreak of COVID-19, as a result, Ash & John was considering the following options: (1) making no change to the depreciation method but re-evaluating the remaining useful life of each machine, or (2) changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method.

A)Discuss how may Option (1) be more appropriate than the original practice (i.e. to recognise depreciation using the straight-line method based on the information in Exhibit 1).

A complete response should include discussions on: (a) the reason(s) why the original practice may not be appropriate, and the outcome if Ash & John continued with the original policy, (b) how to implement Option (1) to more accurately account for depreciation, and the outcome of implementing Option (1) properly.

B)Discuss how may Option (2) be more appropriate than both the original practice (i.e. to recognise depreciation using the straight-line method based on the information in Exhibit 1) and Option (1) given the circumstances regarding the business.

Cite specific information in the case to support your discussion where appropriate. A complete response should include discussions on: (a) the reason(s) why both the original practice and Option (1) may not be appropriate to account for depreciation under the businesss current circumstances (provide reference to case information), (b) the reason(s) why Option (2) may be more appropriate.