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QUESTION 14 (a) Under what circumstances would the following depreciation methods be appropriate? (I) (ii) (iii) Straight linc. Diminishing balance. Units of production. The business
QUESTION 14 (a) Under what circumstances would the following depreciation methods be appropriate? (I) (ii) (iii) Straight linc. Diminishing balance. Units of production. The business of VK Ltd. purchased a new machine on 1 July 2016 for $15,000. Freight of $600 and installation costs of $400 were paid in connection with the new machine. The machine is expected to have a useful life of four (4) years, or 360,000 units of production, and an estimated residual value of S1,000. Required: (b) Complete the table below setting out the depreciation details for the machine under cach of the three depreciation methods for the first two years of the machine's life. (i) Diminishing balance-use 30% as the rate. ( Straight line. (iii) Units of production. Estimated units of production during the first two years were: Year 1-90,000 units Year 2-72,000 units Diminishing Balance 30% Straight Line Year Units of Use DepnBook valueDep Book ValDepn Book Value 30/6/18 VK Ltd. has used their new machine for one year of operations. The owner of VK Ltd. explains to you that because the machine has been very well looked after and maintained if it was to be sold now the machine's price would not be much different from the price paid for it a year ago. As a result, the owner believes that no depreciation expense on the machine is needed for accounting purposes this year. The owner believes that the machine's value will much less in the next year, but this is not a problem because the cash obtained from deducting depreciationwl compensate for the decline in market value over that year. Required: (c) Explain to the owner of VK Ltd what the accounting concept of depreciation is and how their thinking is in eror with respect to that concept
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