Mazlin Limited purchased a machine on account on April 2, 2012, at an invoice price of $360,000. On April 4, it paid $2,000 for delivery of the machine. A one-year, $4,000 insurance policy on the machine was purchased on April 5. On April 18, Mazlin paid $8,000 for installation and testing of the machine. The machine was ready for use on April 30.
Mazlin estimates the machine’s useful life will be five years with a residual value of $80,000. Mazlin has a December 31 year end.
Instructions
(a) Determine the cost of the machine.
(b) Calculate the annual depreciation and total depreciation over the asset’s life using
(1) Straight-line depreciation,
(2) Double diminishing-balance depreciation,
(3) Single diminishing-balance depreciation. Which method causes profit to be lower in the early years of the asset’s life?
(c) Assume instead that, when Mazlin Limited purchased the machine, there was no residual value and the company had a legal obligation to ensure that the machine would be recycled at the end of its useful life. The cost of the recycling will be significant. Would this have an impact on the answers to (a) and (b) above? Explain.
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