WoodCo Ltd., a manufacturer of school desks and cabinets, commenced trading from

Question

WoodCo Ltd., a manufacturer of school desks and cabinets, commenced trading from 1' January 2010, and its financial year in line with the calendar year. The company uses general-purpose equipment to manufacture its products. At The company is considering how it might calculate depreciation on these assets for the financial year just ended. Management is anxious to ensure the accounts reflect a reasonable valuation of its fixed assets at each year end. Required: (A): Write a report for management at WoodCo suggesting a system of depreciation for each asset which might reflect fair valuation, explaining your rationale. (B) (50 Marks) (B) : Using your recommended methodology from above, show the Balance Sheet entries as at 31 December for each of the financial years 2010, 2011 and 2012. (Assume no purchase or disposal of Fixed Assets during the period). (50 Marks)

Explanation / Answer

A)

Depreciation is the reduction in the value of assets due to wear and tear. The depreciated amount is set aside to replace the asset.

MACRS consists of two depreciation systems:

The General Depreciation System (GDS) and the Alternative Depreciation System (ADS)

It is better to use MACRS depreciation rates for the assets to depreciate.

B)

The depreciation reduces the asset by debiting the depreciation and crediting the asset.

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