Dear Colleagues:
1. As per rules provided in the IAS 16, residual value can be taken into account for the *straight line depreciation method* ONLY (not for the reducing balance method).
2. That is why the tutor did not subtract the 10,000 of RV at the beginning, yet he should have been doing so starting from year 6 (sixth).
So the whole calculation of carrying values of this asset should be:
80,000 of initial value
Year 1: depreciation 20% of 80,000 = 16,000, hence carrying value (CV) of the asset 80,000 – 16,000 = 64,000
Year 2: depreciation 20% of 64,000 = 12,800, hence CV of the asset 64,000 – 12,800 = 51,200
Year 3: Depreciation 10,240; CV 40,960
Year 4: Depreciation 8,192; CV 32,768
Year 5: Depreciation 6,554; CV 26,214

At this point a depreciation method has been changed to straight line. For straight line method however we CAN subtract residual value of 10,000 for the sake of calculation of depreciation, which we do:
26,214-10,000=16,214
From this point we divide our depreciation by 5 remaining years: 16,214 / 5 = 3,243 of depreciation charge per year (or in reality 270,23 per month).
So at the end of year 6 our depreciation charge for his year will be equal to 3,243, and carrying value of the asset will be equal to 26,214 – 3,243 = 22,971.
At the end of year 7: Depreciation 3,243; CV 19,278
Year 8: Depreciation 3,243; CV 16,485
Year 9: Depreciation 3,243; CV 13,242
Year 10 (final year): depreciation 3,242 (note it is 1 dollar less due to roundings in previous years) and the CV of the asset: 10,000
Happy to help

sir, can you please solve example @2 . i want to see my answer beacause you have not taken the residual value , will each year take the residual value? please solve it once again

In example 3, it seems from 1 January 20×4 to 1 January 20×9 is 5 yrs, which means from 1 Jan 20×4 to 31 Dec 20×9 is 6 yrs. Why not depreciate it by 6 yrs rather than 5 in the provided answer??

The new method is applied on 1 January 20X9, so the asset will have been depreciated under the old method to to 31 December 20X8. This therefore means it would have been depreciated for 5 years prior to the change in estimate.

Hi all, in Example 2, Ecuador: it states they revise the life expectancy of the asset to 5 yrs on 31 Dec 2014, one full year before the answer. Wouldn’t we apply the first revised depreciation to 2014, and then 2015? That provides an answer of 2x $2.5m and 2x $4m. Remaining Value = $12m.

This is where CIMA trip me up in exams, the questions can always be interpreted in many ways?

PS Loving the OpenTuition lectures. Thanks Chris !!!

Glad you’re enjoying the lectures, and I hope they help you pass the exam.

At the end of 2014 we will have charged a full year’s worth of depreciation already using the old estimate of 10 years because the revised life is applied at the end of the year and not the start of the year.

Having then done that we will then apply the new estimate to the carrying amount at that date and that will give us the depreciation charge for the future, i.e. the five remaining years on the asset.

Oops! There is a slight mistake in my answer but it isn’t when applying the original 20% reducing balance. Residual value is not relevant to reducing balance depreciation.

The mistake is in calculating the new depreciation charge under straight line where I didn’t deduct the 10,000 residual value from the 26,214 carrying value at the date of change in method. I was too engrossed in the example and had forgotten that the residual value was there.

Can I clarify the answer to example 3. I made it 1624 per annum due to deducting RV of 10000 from the CV then dividing by 10 years useful life (not 5 years)

I took the 80k x 80% over 5 years to get 26,214.
Then I deducted the RV of 10k to get 16214 then divided that over the remaining useful life of 5 years to get dep’n charge of 3242.80.

Hi
Per Lidia above I would have taken the 10k residual val from the 80k before calculating the reducing bal to Yr 5, as such Yr 5 CV = €22,937.6 and Dep Chg Yrs 6 – Yr10 = €4,587.52. Can you explain why the residual val was omitted in video?
Thanks
Ward

I don’t think so, the residual value is used when the company calculates this 20% %reducing_balance.
(ps. the “company” has actually made an error, the 20% should have been 18.775% – this is the correct % that leaves RV of 10K after 10 years – but I guess for the exercise is simpler to round it up to 20%).
After this calculation the RV is not taken into account for the CV calculation, only the %.

krasnocudek says

Dear Colleagues:

1. As per rules provided in the IAS 16, residual value can be taken into account for the *straight line depreciation method* ONLY (not for the reducing balance method).

2. That is why the tutor did not subtract the 10,000 of RV at the beginning, yet he should have been doing so starting from year 6 (sixth).

So the whole calculation of carrying values of this asset should be:

80,000 of initial value

Year 1: depreciation 20% of 80,000 = 16,000, hence carrying value (CV) of the asset 80,000 – 16,000 = 64,000

Year 2: depreciation 20% of 64,000 = 12,800, hence CV of the asset 64,000 – 12,800 = 51,200

Year 3: Depreciation 10,240; CV 40,960

Year 4: Depreciation 8,192; CV 32,768

Year 5: Depreciation 6,554; CV 26,214

At this point a depreciation method has been changed to straight line. For straight line method however we CAN subtract residual value of 10,000 for the sake of calculation of depreciation, which we do:

26,214-10,000=16,214

From this point we divide our depreciation by 5 remaining years: 16,214 / 5 = 3,243 of depreciation charge per year (or in reality 270,23 per month).

So at the end of year 6 our depreciation charge for his year will be equal to 3,243, and carrying value of the asset will be equal to 26,214 – 3,243 = 22,971.

At the end of year 7: Depreciation 3,243; CV 19,278

Year 8: Depreciation 3,243; CV 16,485

Year 9: Depreciation 3,243; CV 13,242

Year 10 (final year): depreciation 3,242 (note it is 1 dollar less due to roundings in previous years) and the CV of the asset: 10,000

Happy to help

suraj24 says

sir, can you please solve example @2 . i want to see my answer beacause you have not taken the residual value , will each year take the residual value? please solve it once again

clariek says

Hi,

In example 3, it seems from 1 January 20×4 to 1 January 20×9 is 5 yrs, which means from 1 Jan 20×4 to 31 Dec 20×9 is 6 yrs. Why not depreciate it by 6 yrs rather than 5 in the provided answer??

Thank you!

P2-D2 says

Hi,

The new method is applied on 1 January 20X9, so the asset will have been depreciated under the old method to to 31 December 20X8. This therefore means it would have been depreciated for 5 years prior to the change in estimate.

Thanks

1979stchristopher says

Hi all, in Example 2, Ecuador: it states they revise the life expectancy of the asset to 5 yrs on 31 Dec 2014, one full year before the answer. Wouldn’t we apply the first revised depreciation to 2014, and then 2015? That provides an answer of 2x $2.5m and 2x $4m. Remaining Value = $12m.

This is where CIMA trip me up in exams, the questions can always be interpreted in many ways?

PS Loving the OpenTuition lectures. Thanks Chris !!!

P2-D2 says

Hi,

Glad you’re enjoying the lectures, and I hope they help you pass the exam.

At the end of 2014 we will have charged a full year’s worth of depreciation already using the old estimate of 10 years because the revised life is applied at the end of the year and not the start of the year.

Having then done that we will then apply the new estimate to the carrying amount at that date and that will give us the depreciation charge for the future, i.e. the five remaining years on the asset.

Thanks

P2-D2 says

Hi,

Oops! There is a slight mistake in my answer but it isn’t when applying the original 20% reducing balance. Residual value is not relevant to reducing balance depreciation.

The mistake is in calculating the new depreciation charge under straight line where I didn’t deduct the 10,000 residual value from the 26,214 carrying value at the date of change in method. I was too engrossed in the example and had forgotten that the residual value was there.

Thanks

baroquechick86 says

Hi,

Can I clarify the answer to example 3. I made it 1624 per annum due to deducting RV of 10000 from the CV then dividing by 10 years useful life (not 5 years)

antonycima2 says

So the correct answer should be ( $26,214 -$10000) / 5 = $4553.6

teeceeabz says

Still confused over this one.

I took the 80k x 80% over 5 years to get 26,214.

Then I deducted the RV of 10k to get 16214 then divided that over the remaining useful life of 5 years to get dep’n charge of 3242.80.

Can the final answer please be clarified??

bongani8824 says

You have to reduce the residual every year i.e year one (80 000 – 10000) x 20%= 14 000 year 2( 66 000 – 10 000 x 20%) etc

Hope all is clear

edit says

I have the same query re: residual value.

Thanks

warddunphy says

Hi

Per Lidia above I would have taken the 10k residual val from the 80k before calculating the reducing bal to Yr 5, as such Yr 5 CV = €22,937.6 and Dep Chg Yrs 6 – Yr10 = €4,587.52. Can you explain why the residual val was omitted in video?

Thanks

Ward

lidcar says

Hello,

I would like to ask you shouldn’t the residual value be deducted from original value when CV is calculated?

Thank you.

antonycima2 says

I don’t think so, the residual value is used when the company calculates this 20% %reducing_balance.

(ps. the “company” has actually made an error, the 20% should have been 18.775% – this is the correct % that leaves RV of 10K after 10 years – but I guess for the exercise is simpler to round it up to 20%).

After this calculation the RV is not taken into account for the CV calculation, only the %.