A supplied straight-line depreciation model
A practice company buys a machine for ten million won and pays one million won for installation needed to make it ready for its intended use. The exercise supplies a residual value of one million won, a five-year useful life and straight-line depreciation for a complete year. It assumes the machine is ready at the beginning of that year and excludes VAT, borrowing costs and tax adjustments from the calculation. A trainee deducts the installation payment immediately as a routine expense and then depreciates the purchase price without subtracting residual value. The assessor asks for the carrying-cost basis and annual accounting depreciation under the stated assumptions, rather than a statutory tax depreciation rate.
1. Calculate initial cost and annual depreciation.
Read the worked answer
Initial cost is 10,000,000 + 1,000,000 = 11,000,000 won. Depreciable amount is 10,000,000 after residual value; annual depreciation is 10,000,000 / 5 = 2,000,000 won.
2. Identify the errors.
Read the worked answer
The required installation belongs in initial cost under the exercise assumptions. Residual value is deducted before allocating the depreciable amount over the supplied life.