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Dear Mike,
Could you please advise on below? i calculated with 10 % as residual value? why in answer it haven’t been considered?
question:
Although most items in financial statements are shown at their historical cost, increasingly the IASB is requiring orallowing current cost to be used in many areas of financial reporting.Drexler acquired an item of plant on 1 October 2012 at a cost of $500,000. It has an expected life of five years(straight-line depreciation) and an estimated residual value of 10% of its historical cost or current cost as appropriate.As at 30 September 2014, the manufacturer of the plant still makes the same item of plant and its current price is $600,000.What is the correct carrying amount to be shown in the statement of financial position of Drexler as at 30 September 2014 under historical cost and current cost?
answer:
Historical cost annual depreciation = $90,000 ((500,000 x 90%)/5 years).
After two years carrying amount would be $320,000 (500,000 – (2 x 90,000)).
Current cost annual depreciation = $108,000 ((600,000 x 90%)/5 years).
After two years carrying amount would be $384,000 (600,000 – (2 x 108,000)).You write “i calculated with 10 % as residual value? why in answer it haven’t been considered?”
and I say ….. it HAS been considered
Historical cost annual depreciation = $90,000 ((500,000 x 90%)/5 years)
takes depreciation on just (500,000 – 50,000)
So 2 years’ depreciation calculated on 450,000 = 180,000 (90,000 per year)
cost of 500,000 – 180,000 = carrying value of 320,000
Current cost annual depreciation = $108,000 ((600,000 x 90%)/5 years)
takes depreciation on just (600,000 – 60,000)
So 2 years’ depreciation calculated on 540,000 = 216,000 (108,000 per year)
cost of 600,000 – 216,000 = carrying value of 384,000
Is that better?
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