Question 2 (25 marks)

In the year ending 31 December 2018, Happy Ltd bought a new machine and made the following payments in relation to it:

$

Cost as per suppliers list 48,000

Discount received from the supplier 4,000

Delivery charge 400

Installation charge 800

Maintenance charge 1,200

Additional component to increase capacity 1,600

Replacement parts 1,000

Required:

a Determine and justify the cost which should be used as the basis for depreciation. (7 marks)

b What is depreciation? Why is it necessary? (6 marks)

c Explain the term objectivity as used by accountants. To what extent is depreciation objective? (5 marks)

d It is common practice in some countries to use the diminishing balance for machines in the early years of an assets life and then change to the straight-line method as soon as this would give a higher annual charge. What do you think of this practice? (7 marks)