3. On June 30, 2018, Rosetta Granite purchased a machine for $140,000. The estim
ID: 2563024 • Letter: 3
Question
3.
On June 30, 2018, Rosetta Granite purchased a machine for $140,000. The estimated useful life of the machine is eight years and no residual value is anticipated. An important component of the machine is a specialized high-speed drill that will need to be replaced in four years. The $30,000 cost of the drill is included in the $140,000 cost of the machine. Rosetta uses the straight-line depreciation method for all machinery.
Required:
1. Calculate depreciation for 2018 and 2019 applying the typical U.S. GAAP treatment.
2. Calculate depreciation for 2018 and 2019 applying IFRS.
Explanation / Answer
1. calculation of depreciation using typical US GAAP treatment. ..(usig straight line method).
annual depreciation = (cost of the asset - salvage value) / life of asset.
=> ($140,000 - $0) / 8 years.
=>$17,500. per year.
depreciation in 2018 = $17,500 * (6/12) =>$8,750.....(since machine was purchased on june 30, only 6 months depreciation is required).
depreciation in 2019 = $17,500.
2. depreciation using IFRS.
As per IFRS, the value of component having significant value and having a seprate life should be depreciated separately.
i.e the component having a life of 4 years and value of $30,000 will be depreciated separately.
accoridingly the cost of machine will now be = $140,000 - $30,000 =>$110,000.
the annual depreciation will be = ($110,000 - $0) / 8 =>$13,750.
on the other hand the annual depreciation on component will be = $30,000 / 4 years =>$7,500...(since life of the component is 4 years).
total depreciation in 2018 will be = ($13,750 + $7,500) * 6/12 =>$10,625.
depreciation in 2019 => ($13,750 + $7,500) =>$21,250.
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