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An entity purchases an aircraft that has an expected useful life of 20 years with no residual value. The aircraft requires substantial overhaul at the end of years 5, 10 and 15. The aircraft cost $25 million and $5 million of this figure is estimated to be attributable to the economic benefits that are restored by the overhauls. In year 6, the cost of the overhaul is estimated to be $6 million.
Calculate the annual depreciation charge for the years 1–5 and years 6–10.
sir i understand that the annual deprn charge will be 1m and 1.2m respectively fro yr1-5 and 6-10yrs. but what i was thinking was, if in the year 5 we realise our estimate was wrong adn overhaul costs are coming out to be 7m instead of 5m then what do we do? in year 5 debit 3m as overhaul costs?
thanks in advance sir!
Where on earth did you find this question, because I do not believe that it could really be asked in Paper FA.
However the depreciation from years 1-5 is not 1m, it is $25/20 = $1.25m per year.
From years 6-10 it will be calculated on 25 – 5 + 6 = $26mHad the overhaul cost 7m, then from 6-10 the depreciation will be calculated on 25 – 5 + 7 = $27m.
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