Question

On 1 January 2020, Frank’s Physio purchased a new reformer machine at a cost of $90,000. Installation costs were $10,000. The reformer machine is expected to have a useful life of five years and a residual value of $5,000. During its life, the reformer machine is expected to be used for 760,000 hours. During the year ended 31 December 2020, the reformer machine was used for 70,000 hours.

Required:

(a) Assuming a 31 December year end, calculate the depreciation expense for 2020 using the following depreciation methods (show all workings):

1. Straight-line;                                                                                       
2. Reducing-balance (at a rate of 30% per annum); and
3. Units-of-production.                                                                          

(b)     Assume that after two years use, the reformer machine is sold for $50,000 (cash). Prepare the general journal entry for its sale using the reducing-balance depreciation method. (Explanation not required)

Answer 1

a)

	Depreciation expense for 2020	$
1	SLM = (Cost - residual value )/useful life = ($100,000 - $5,000)/5	$19,000
2	Reducing balance method = (Cost - Depreciation already provided till the date ) x Rate of depreciation = ($100,000 - $0) x 30%	$30,000
3	Units of production method = ((Cost - residual value) /Estimated hours during life of an asset ) x hours for the year) = ($100,000 - $5,000)/760,000 hours x 70,000 hours	$8,750

b)

Asset schedule as per Reducing balance method
Year	Depreciation @ 30% on asset balance	Asset balance
0		$100,000
1	$30,000	$70,000
2	$21,000	$49,000

Date	Particulars	Debit $	Credit $
	Cash	$50,000
	Accumlated depreciation	$51,000
	Asset		$100,000
	Gain on sale of an aseet		$1,000
	[Asset sold for gain]

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