On 1 January 2014, Special Ltd acquired a wood lathe for $31 500, which included shipping charges of $500. The lathe has an estimated useful life of 5 years (or 30 000 machine hours of operation) and a residual value of $3000. Insurance on the lathe while in transit was $150; insurance against damage for 1 year amounted to $250. Finally, installation costs were $1000 and test runs before commissioning totaled $350.
During the first year of operation the machine was operated for 6200 hours.
Required
- Calculate the cost of the lathe.
- Calculate the depreciation for the year ending 31 December 2014 using each of the following methods:
- straight-line
- unit-of-production
- diminishing-balance (use rate of 38%)
- sum-of-years-digits.
The nature of depreciation is discussed in IAS 16/AASB 116. Outline alternative views considered for the accounting treatment of deprecation and discuss the rationale for the treatment adopted in the standard.