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Why is the net book value for the building computed as 800*40/50. How is the 40 years arrived from?
The question says: “The property’s total useful life was 50 years on 1 July 20W7…”
Notice that it is written 20W7 with a “W” here and not an “X”, ie ten years earlier.
This is the reason why the accumulated depreciation on 1 July 20X7 is 800*10/50, hence a book value of 800*40/50.
Hopefully, that will help.
That was helpful. Thank you. I have another query in this same qn. I see the loss on disposal of the freehold property proportioned i.e 1/40, what does this mean?
Actually, it is not the loss on disposal of the freehold but rather the extra depreciation charge that needs to be charged in group accounts.
Let me explain.
The cost to the group of the freehold property amounts to $900,000 (including land element $100,000).
Highland acquired the property and booked it in its own separate accounts at cost of $800,000 (including land element $300,000).
Therefore it must certainly have already booked in its separate accounts a depreciation charge of $12,500 (building element 500,000 divided by remaining useful life of 40 years)
However, since we are in a situation of intragroup trading (intragroup sale of non-current asset), we must consider that no sale took place on the group perspective and therefore calculate the depreciation charge based on the initial cost to the group (building element initial cost 800,000 divided by the whole useful life being 50 years = 16,000).
Hence: 16,000 – 12,500 = 3,500 additional depreciation charge.
Hopefully, this is clear enough.