Question

On June 30, 2013, Rosetta Granite purchased a machine for $120,000. The estimated useful life of the machine is eight years and no residual value is anticipated. An important component of the machine is a specialized highspeed drill that will need to be replaced in four years. The $20,000 cost of the drill is included in the $120,000 cost of the machine. Rosetta uses the straight-line depreciation method for all machinery. Required: 1. Calculate depreciation for 2013 and 2014 applying the typical U.S. GAAP treatment. 2. Repeat requirement 1 applying IFRS.

Answer 1

Step-by-step explanation:

1. Under typical U.S. GAAP treatment:

To calculate depreciation for 2013, we divide the cost of the machine ($120,000) by its useful life (8 years):

Depreciation for 2013 = $120,000 / 8 = $15,000

To calculate depreciation for 2014, we use the same formula since the useful life has not changed:

Depreciation for 2014 = $120,000 / 8 = $15,000

2. Under IFRS treatment:

Under IFRS, the cost of the specialized high-speed drill should be recognized separately from the cost of the machine. Therefore, we need to allocate the cost of the drill over its useful life.

The cost of the drill is $20,000, and its useful life is 4 years. Therefore, the annual depreciation for the drill is:

Depreciation for the drill = $20,000 / 4 = $5,000

To calculate depreciation for 2013, we divide the cost of the machine ($120,000 - $20,000) by its useful life (8 years), and then add the depreciation for the drill:

Depreciation for 2013 = ($120,000 - $20,000) / 8 + $5,000 = $15,000 + $5,000 = $20,000

To calculate depreciation for 2014, we use the same formula since the useful life has not changed, and add the depreciation for the drill:

Depreciation for 2014 = ($120,000 - $20,000) / 8 + $5,000 = $15,000 + $5,000 = $20,000

Therefore, under IFRS treatment, the depreciation for 2013 and 2014 is $20,000 each year.