Question

Marigold Corp. purchased machinery for $576,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, residual value of $16,000, production of 560,000 units, and 40,000 working hours. The machinery will have a physical life of 15 years and a salvage value of $3,000. During 2018, Marigold Corp. used the machinery for 2,200 hours and the machinery produced 26,500 units. Marigold prepares financial statements in accordance with IFRS.

From the information given, calculate the depreciation charge for 2018 under each of the following methods, assuming Marigold has a December 31 year end.

Calculate the depreciation charge for 2018 under straight-line method.

a)

Depreciation charge for 2018

2)

Rational and systematic amortization policies are justifiable and appropriate because of the:

A	economic entity assumption.

B	practice of matching.

C	monetary unit assumption.

D	fair value principle.

Answer 1

a.  Depreciation under Straight line  

           
Depreciation per year = (Cost of asset - salvage value) / useful life of asset  
= $ (576,000 - $16,000) / 10              
= $ 56,000              
Depreciation for the year 2018 = $ 56,000

Physical life of the asset cannot be determined now,hence we will use the estimated uselife life and residual value to calculate depreciation per year.

2) Correct Option is

B. Practice of matching

This is because amortization is a method of matching revenue with expenses.