Kokoto Contractors Ltd was formed on 1 January 2006 and the following purchases and sales of machinery were made during the first 3 years of operations:
\begin{tabular}{|l|l|l|l|}
\hline Date & Asset & Transaction & Price \\
\hline 1 January 2006 & Machine 1 and 2 & Purchase & Kshs. 400,000 each \\
\hline 1 October 2006 & Machine 3 and 4 & Purchase & Kshs. 152,000 each \\
\hline 30 June 2008 & Machine 3 & Sale & Kshs. 126,400 \\
\hline 1 July 2008 & Machine 5 & Purchase & Kshs. 200,000 \\
\hline
\end{tabular}
Each machine was estimated to last 10 years and to have a residual value of \( 5 \% \) of its cost price. Depreciation was by equal instalments, and it is company policy to charge depreciation for every month an asset is owned.
Required:
(a) Prepare:
(i) Machinery Account
(ii) Provision for depreciation to show total depreciation on Machinery for each of the years 2006, 2007 and 2008;
(iii) The income statement and statement of financial position extracts for each of the years 2006, 2007 and 2008.
(iv) Show the profit or loss on the sale of Machine 3 in 2008.
(b) Contractors Ltd. depreciates its vehicles by 30\% per annum using the diminishing balance method. What difference would it have made to annual reported profits over the life of a vehicle if it had decided to depreciate this asset by \( 20 \% \) straight-line?
(Total: 15 Marks)
