Question 6

Dion Ltd invested in an advanced cutting equipment for $248,200 on 1 January 2019 and estimated that the equipment can be used for five years. At the end of 2023 (5th year), it is estimated that the equipment can be sold for $12,500.

Required:

(a) Explain the term depreciation and provide reasons for the purpose of depreciation.

(b) Prepare the depreciation schedule by computing the depreciation and net book value for the equipment for the years 2019, 2020, 2021, 2022 and 2023 if the company uses:

(i) The straight-line method of depreciation. (4 marks)

(ii) The reducing balance method of depreciation applied at a rate of 25% per year.

(c) On 31 December 2021, the company decided to sell the existing equipment as it lacked the precision required as compared to the newer technology. Dion Ltd is able to dispose the existing equipment for price of $105,000.

Calculate the gain or loss on disposal of the existing equipment if the company uses:

(i) The straight-line method of depreciation.

(ii) The reducing balance method of depreciation applied at a rate of 25% per year.