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Hello Sir,
Could you please help me with this question?
Alfie purchased a Non-current asset for 100,000 on 1st January 20×2 and started depreciating it over 5 years. Residual value was taken as 10,000.
At 1st January 20×3 a review of asset lives was undertaken and the remaining useful life of the asset was estimated at 8 years. Residual value was estimated to be nil.
Calculate the depreciation charge for the year ended 31st December 20×3 and subsequent years.
Ans: 10,250
Solution: They have used 82,000/8 years to arrive at the new depreciation charge.
Sir, I understand that we would utilise the new revised useful life of 8 years.
I’m confused as to why they didn’t use the original cost to calculate the depreciation since it’s a straight line method?when we revise estimates, do we utilise the CA?
Would really appreciate your help.
Thank you!
We never use the original cost when there is a change of estimates.
As at 31 December 20X2 the carrying value was 100,000 – ((100,000 – 10,000)/5) = 82,000.
Therefore it is the 82,000 that remains to be depreciated. The residual value is now zero and the expected remaining life is now 8 years. So to depreciate it down to zero over 8 years means a depreciation charge in future of 82,000/8.
The current assets have nothing to do with it.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Thank you so much sir, was a bit confused. Thank you clarifying that we never use cost.
Much appreciated.
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