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Hi. This question is from Kaplan ST chapter 11 TYU 8
Please help me understand how the depreciation is calculated for Plant & Machinery.
Thank you so much!Merryview specialises in long-term contracts. In each contract
Merryview is entitled to receive payments reflecting the progress of the
work, so revenue should be recognised over time.
One of its contracts, with Better Homes, is to build a complex of luxury
flats. The price agreed for the contract is $40 million and its scheduled
date of completion is 31 December 20X2. Details of the contract to
31 March 20X1 are:
Commencement date 1 July 20X0
Contract costs: $000
Architects’ and surveyors’ fees 500
Materials 2,800
Direct labour costs 3,500
Overheads are apportioned at 40% of direct labour
costs
Estimated cost to complete
(excluding depreciation – see below) 14,800
Plant and machinery used exclusively on the contract cost $3,600,000
on 1 July 20X0. At the end of the contract it is expected to be
transferred to a different contract at a value of $600,000. Depreciation
is to be based on a time-apportioned basis. Better Homes made a
progress payment of $12,800,000 to Merryview on 31 March 20X1.Hi,
We need to depreciate the depreciable amount of the plant and machinery item over the length of time it is used on the contract.
The depreciable amount is the cost less the residual value. The cost is given as $3.6m and the residual value is the value at the end of the contract, so the $600k. This gives the depreciable amount of $3m.
The period of the time the asset is used for is from 1 July 20X0 to the end of the contract 31 December 20X2. From this you can work out the number of months in total we use the asset for and then depreciate it on a monthly basis.
Hope that clears things up a bit.
Thanks
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