Posted: January 2nd, 2016

Acquisition and Depreciation- On 1st January 2016 Special Ltd

Acquisition and Depreciation
On 1st January 2016 Special Ltd acquired a wood lathe for $75 000 which included shipping charges of $5 000. The lathe has an estimated useful life of 5 years (15 000 machine hours of operation) and a residual value of $15 000. Insurance on the lathe while in transit was $3,000 insurance against damage for 1 year amounted to $6,500. Finally installation costs were $2,200 and test runs before commissioning totalled $2,000. During the first year of operations the machine was operated for 5 550 hours
Required:
A. Calculate the cost of the lathe (4 marks)
B. Calculate the depreciation for the year ending 31 December 2016 using each of the following methods:
(i) Straight Line (1 mark) (ii) Units of production (1 mark)
(iii) Diminishing balance (use rate of 38%) (1 mark)

(iv) Sum of the years digits. (1 mark)
C. The nature of depreciation is discussed in IAS 16/AASB 116. Outline alternative views considered for the accounting treatment of depreciation and discuss the rationale for the treatment
adopted in the standard. ( 500 words) 7 marks