Evaluate different depreciation methods that could be used for financial reporting purposes.

Evaluate different depreciation methods that could be used for financial reporting purposes.

Q1

PSB8.8 Buttercup Ltd purchased machinery on 1 January 2015, at a cost of $310 000. The estimated useful life of the machinery is 5 years, with an estimated residual value at the end of that period of $40 000. The entity is considering different depreciation methods that could be used for financial reporting purposes.

Required

(a) Prepare separate depreciation schedules for the machinery using the straight-line method, and the diminishing-balance method. Round to the nearest dollar.

(b) Which method would result in the higher reported pro t in 2015? In the higher total reported pro t over the 5-year period?

Q2

 PSA8.8 Carpet Ltd purchased machinery on 1 January 2015, at a cost of $400 000. The estimated useful life of the machinery is 4 years, with an estimated residual value at the end of that period of $40 000. The entity is considering different depreciation methods that could be used for financial reporting purposes for the year ended

31 December 2015.

Required

  • (a)  Prepare separate depreciation schedules for the machinery using the straight-line method, and the diminishing-balance method. Round to the nearest dollar.
  • (b)  Which method would result in the higher reported pro t in 2015? in the higher total reported pro t over the 4-year period?

Q3

Ryans Music provides individual music lessons in the homes of clients. The following data are provided with respect to the last 12months of activity ending 30 June 2015.

Lesson selling price $45

Lesson labour cost $30

Annual fixed costs $18 000

Lesson sheet music costs $3

Required

  1. Assuming selling prices and costs remain the same as for 2015 calculate the number of lessons that are required to be sold in 2016 to break even.
  2. If 4000 music lessons were ‘conducted’ in 2016, what profit would be achieved?
  3. For 2016, Ryans expects the lesson labour cost to increase by $2 but, because of local competitive forces, Ryans does not wish to increase the lesson price. With some careful management, Ryans hopes to reduce annual fixed costs to $15 000. Calculate the number of music lessons that would need to be performed in order to match the profit calculated in (c) above.

 

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