Question 1

In the year to 31 December 20x9, Annie bought a new machine and made the following payments in relation to it:

$

$

Cost as per supplier's list

12,000

Less: agreed discount

1,000

11,000

Delivery charge

100

Erection charge

200

Maintenance charge

300

Additional component to increase capacity

400

Replacement parts

250

Required:

(a)State and justify the cost figure which should be used as the basis for depreciation

(b)What does depreciation do and why is it necessary?

(c)Briefly explain, without numerical illustration, how the straight line and diminishing balance methods of depreciation work. What different assumptions does each method make?

(d)Explain the term "objectivity" as used by accountants. To what extent is depreciation objective?

(e)It is common practice in the financial statements in Malaysia to use diminishing balance method for PPE in the early years of the asset's life, and theto change to the straight line method as soon as this would give a higher annual charge. What do you think of this practice? Refer to relevant accounting conventions in your answer.

(Total 20 marks)