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Question 2 Not yet answered Marked out of 2
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Question 2 Not yet answered Marked out of 2.00 Flag question Fixed and variable costs may be allocated to a cost object. Select one: True False Next page
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Question 5 Saud LLC Purchased a delivery van for OMR 40000 on 1st January 2016. Depreciation rate is 15% per year on Reducing Balance Method. As at 1st January 2020 the van could be sold to another company for OMR 30000 but there would be repair costs of OMR 2000. To replace the van with a new version would cost OMR 36000. The cash flows from the existing van are estimated to be as follows: Year 1 20000 Year 4 16000 Year 2 26000 Year 5 12000 Year 3 25000 Year 6 24000 The optional discount rates for this company are as follows: Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 7% 9% 12% 16% 17% 10% Note: Selection is from your own choice Calculate the value of this van under the following bases: a) Historical cost (5) b) Net realisable value (3) c) Current cost (5) d) Present value (7) (Total of 20 Marks
Expert Solution
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TRUE Cost allocation is the process of assigning indirect costs to cost objects such as a product, a department, a job. Indirect costs can be both variable and fixed. -
1. Historical Cost means the cost at which Asset is Purchased ab=nd it will be recorded in books.
In given case Historical Cost of Van = OMR 40000
2. Net Realisable Value = Estimated Selling price - Estimated cost to complete such sale
NRV = OMR 30000 - OMR 2000 = OMR 28000
3. Current Cost means the cost that would be required to replace an asset in the current period
Current Cost = OMR 36000
4. Present Value of Van = OMR 90347
(Assuming 10% Discount rate)
Year
Cash Flows-a
PVF@10%-b
Pv of Cash Flows- a*b
1
20000
0.909
18180
2
26000
0.826
21476
3
25000
0.751
18775
4
16000
0.683
10928
5
12000
0.621
7452
6
24000
0.564
13536
90347
While calculating present value , Residual value is not considered because there is no sale information at the end of sixth year
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