4. JAM is an apparel retailer that is listed in the Sun City Stock Exchange. JAM aims to be a design-driven, creative and responsible global fashion company with a passion for fashion and an ambition to always exceed customer expectations. Its business concept is to offer fashion and quality at the best price. The company has branded stores and franchises around the world and sells through concessions in third-party stores as well. The company also has licensing agreements globally, leveraging on the local and technical expertise of its license partners.JAM has a financial year which ends on 31 December and is subject to an income tax rate of 20%.
The table below is an extract from its financial statements for the year ended 31 Dec 2012 and provides information of the company's equipment:

(million $) 2012

Equipment at cost (beginning balance) 13,605
Equipment net book value (beginning balance) 7,134
Cost of equipment acquired during the year 3,466
Equipment depreciation expense 1,750

JAM uses straight-line depreciation method for its equipment. All JAM's equipment has zero residual values and the company recognizes half a year of depreciation on assets acquired during the year.

Firms in the same industry usually depreciate their equipment on a straight-line basis with zero salvage value over a useful life of eight years.

Required
(a) Calculate the annual depreciation rate that JAM uses for its equipment. In addition, compute the average age of equipment.
(b) Compute the industry's average annual depreciation rate for equipment. What adjustments to JAM's (i) balance sheets of 2011 and 2012 and (ii) income statement of 2012, would be required if you assume that JAM uses the industry's average depreciation rate?

Question

4. JAM is an apparel retailer that is listed in the Sun City Stock Exchange. JAM aims to be a design-driven, creative and responsible global fashion company with a passion for fashion and an ambition to always exceed customer expectations. Its business concept is to offer fashion and quality at the best price. The company has branded stores and franchises around the world and sells through concessions in third-party stores as well. The company also has licensing agreements globally, leveraging on the local and technical expertise of its license partners.JAM has a financial year which ends on 31 December and is subject to an income tax rate of 20%.
The table below is an extract from its financial statements for the year ended 31 Dec 2012 and provides information of the company's equipment:
 




 (million $)                                                                                2012



Equipment at cost (beginning balance)                                        13,605
Equipment net book value (beginning balance)                             7,134
Cost of equipment acquired during the year                                 3,466
Equipment depreciation expense                                                 1,750




JAM uses straight-line depreciation method for its equipment. All JAM's equipment has zero residual values and the company recognizes half a year of depreciation on assets acquired during the year.

 
Firms in the same industry usually depreciate their equipment on a straight-line basis with zero salvage value over a useful life of eight years.
 

Required
(a) Calculate the annual depreciation rate that JAM uses for its equipment. In addition, compute the average age of equipment.
(b) Compute the industry's average annual depreciation rate for equipment. What adjustments to JAM's (i) balance sheets of 2011 and 2012 and (ii) income statement of 2012, would be required if you assume that JAM uses the industry's average depreciation rate?

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