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Hello Sir. I’ve bee working on a revision kit and I got 1 question I couldn’t understand even with an answer sheet.
Chris purchased a building at a cost of $45,000 on 1 January 1994 with a useful life of 50 years. Chris’s policy is to depreciate buildings 2% per annum straight-line basis with a full years charge in the year of acquisition and none in the year of disposal.
On 1 January 2009 the building had been valued by a qualified valuer, the valuation given was $150,000. Chris would like to incorporate this valuation in the financial statements for the year ended 31 December 2009.
Chris has stated that the useful life of the asset will remain at fifty years as of 1/1/94.
-> Calculate the depreciation charge for the year ended 31 December 2009
In the answer sheet, it says Depreciation charge for y/e 31.12.09 = $150,000 /35 = $4,286
I understand why and where $150,000 /35 comes from, but why not multiply it by 2%?
It seemed to be worked out by (Cost – Estimated Residual Value) / Estimated useful Life all of sudden. Before the revaluation took a place, The depreciation was done by % x Cost..
so I thought it should be done $150,000 /35 x 2% .
Depreciating at 2% straight line is the same as straight line depreciation over 50 years (100%/2%).
As at the date of the revaluation, the building had already been owned for 15 years, and therefore the remaining life is 35 years. Therefore in future the revalued amount will be spread over 35 years.
I do suggest that you watch 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.
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