Coconut Plantations Pty Ltd purchased machinery for its manufacturing process on 1 March 2018. The machinery cost $600 000. Coconut Plantations estimates that the machinery has a useful life of five years, and will have a $50 000 residual value. Using diminishing balance depreciation, estimate the depreciation expense to be recorded in the statement of profit or loss for the year in which the machine was purchased and the subsequent year, assuming Coconut Plantations' reporting period ends on 31 December. The machinery is depreciated using a 20% depreciation rate.

Prepare the journal entry for the 1^st year.

 

Year Depreciation charge Depreciation Expense(To Statement of P&L) Accumulated Depreciation

1 0.2*$600,000*10/12=$100,000 $100,000 $100,000

2 0.2*$500,000 =$100,000 $100,000 $200,000

3 0.2*$400,000 =$80,000 $80,000 $280,000

4 0.2*$320,000 =$64,000 $64,000 $344,000

5 0.2*$256,000 =$51,200 $51,200

The depreciation expense to be recorded in the statement of profit or loss for the first year(year in which machine was purchased is $100,000. We have to take into consideration the date the machine was purchased(1st march, 2018) and the reporting period of the company(31st December each year). This implies that the machine was used for 10 months the end of 2018 financial year.

Step-by-step explanation

Under the diminishing balance method, depreciation charged is applied by multiplying a fixed rate of depreciation on the cost of the asset in the first year. Then in the subsequent years, depreciation is charged by applying the rate of depreciation on the net book value, where NBV= Cost of asset- accumulated depreciation. Depreciation charged as expense tends to reduce from year to year.