Topic10-tutorialanswers..doc

UNIVERSITY OF ADELAIDE SCHOOL OF COMMERCE MASTER OF COMMERCE (ACCOUNTING) ACCTING 7019 ACCOUNTING CONCEPTS AND METHODS (M) Topic 10: Accounting for non-current assets. TUTORIAL Questions and Problems Text, page 619, Discussion questions 5 and 7 5. Z Ltd depreciates its equipment using the straight-line method of depreciation. Y Ltd, which owns similar equipment, and purchased the item on the same day from the same supplier as Z Ltd, uses the diminishing-balance method. Are the depreciation charges of these two companies non-comparable? Explain. This question requires a discussion of the nature and purpose of depreciation. Assuming that depreciation is an allocation of cost over useful life, as per IAS 16/AASB 116, it is important to consider how to select an allocation method. Refer to the appropriate sections of the standard, and to the relevant discussion on allocation methods and their outcomes as covered in the text. Note that the total cost of an asset over its useful life and disposal is the same under all methods. It is not necessarily inconsistent that both Z Ltd and Y Ltd adopt different depreciation allocation patterns for the same asset, as they may have used the asset differently over their useful lives. The important criterion to consider in selecting a depreciation method is the expected pattern of usage of the economic benefits to be derived from the asset. The depreciation charges would be non-comparable if both companies used different depreciation methods over the same useful lives if the pattern of usage is the same between Z Ltd and Y Ltd. 7. At a recent seminar, a managing director of a well-known company argued that the diminishing-balance method of depreciation was the best method to use because it had the effect of producing a ‘nice, smooth income (profit) flow’. Discuss how this could occur, and consider the desirability of reporting smooth profit flows. What role does/should the acco