In the year to 31 December 20X9, Amy bought a new machine and made the following payments in relation to it:
(a) State and justify the cost figure which should be used as the basis for depreciation.
(b) What does depreciation do, and why is it necessary?
(c) Briefly explain, without numerical illustration, how the straight-line and diminishing balance methods of depreciation work. What different assumptions does each method make?
(d) Explain the term ‘objectivity’ as used by accountants. To what extent is depreciation objective?
(e) It is common practice in published accounts in Germany to use the diminishing balance method for PPE in the early years of an asset’s life, and then to change to the straight-line method as soon as this would give a higher annual charge. What do you think of this practice? Refer to relevant accounting conventions in your answer.