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The following information is relevant.
(a) Included in Sopel’s property at the date of acquisition was a leasehold property recorded at its depreciated
historical cost of $400,000. On 1 April 20X8 the leasehold was sublet for its remaining life of four years at an
annual rental of $80,000 payable in advance on 1 April each year. The directors of Hample are of the opinion
that the fair value of this leasehold is best reflected by the present value of its future cash flows. An
appropriate cost of capital for the group is 10% per annum.
The present value of a $1 annuity received at the end of each year where interest rates are 10% can be taken as:
$
3 year annuity 2.50
4 year annuity 3.50how to calculate depreciation and carrying value
thank you in advance$80,000 + ($80,000 x 2.50) = 280,000
Depreciation is 280,000 / 4 = 70,000
What does the answer say?
you are right
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sir i didnt get this part explain $80,000 + ($80,000 x 2.50) = 280,000The timing of cash flows is important! The first 80,000 is payable instantly and is therefore worth 80,000
The second, and subsequent payments are payable in the future and should be discounted.
80,000 discounted for ONE year at 10% + 80,000 discounted for TWO years at 10% + 80,000 discounted for THREE years at 10% is easily calculated by multiplying 80,000 by the 3 year cumulative discount factor of 2.50
Is that better?
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