XYZ Pty Ltd bought a new equipment on 1 July 2018 at a cost of $130,000. Freight and installation costs amounted to $30,000. The equipment is expected to have a useful life of four year and a residual value at the end of that period of $10,000. During its useful life, the equipment is expected to operate for 25,000 hours. The equipment has operated for 7000 hours during the year ended 30 June 2019 and 9,000 hours during the year ended 30 June 2020. Required: a. Calculate the cost of the equipment for accounting reporting purpose. (1 mark) b. Calculate the annual depreciation expense for the equipment for the year ended 30 June 2019 and 30 June 2020, using: i. Straight-line method, ii. Reducing balance method at 50% p.a., and iii. Units of production method. (12 marks) c. Calculate the carrying value of the equipment in the balance sheet of XYZ Pty Ltd at 30 June 2019 and 30 June 2020 under the straight-line method, the reducing balance and the units of production method. (12 marks).
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
XYZ Pty Ltd bought a new equipment on 1 July 2018 at a cost of $130,000. Freight and installation costs amounted to $30,000. The equipment is expected to have a useful life of four year and a residual value at the end of that period of $10,000. During its useful life, the equipment is expected to operate for 25,000 hours. The equipment has operated for 7000 hours during the year ended 30 June 2019 and 9,000 hours during the year ended 30 June 2020.
Required:
a. Calculate the cost of the equipment for accounting reporting purpose. (1 mark)
b. Calculate the annual
i. Straight-line method,
ii.
iii.
c. Calculate the carrying value of the equipment in the balance sheet of XYZ Pty Ltd at 30 June 2019 and 30 June 2020 under the straight-line method, the reducing balance and the units of production method. (12 marks).
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