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Qn) The liverpool company acquired a drilling machine on 1 october 20X5 at a cost of $25 000 and depreciated it at 25% per annum on a straight line basis.
On 1 october 20X7, $5000 was spent on an upgrade to the machine in order to improve its efficiency and increase the inflow of economic benefits over the machine’s remaining life .
According to IAS 16, what depreciation expense should be recognised in profit or loss for the year ended 30 September 20X8 ?
My answer:
Depreciation from 1 october 20X5 to 30 September 20X7
= (25000 x 25% ) x 2
= 12500Carrying value at 30 september 20X7
= 25000 – 12500
= 12500Capitalize $5000
Therefore, depreciation from 30 September 20X7 to 30 September 20X8
= (12500+5000) x 25%
= 4375But the answer key states that the answer is 8750. Where did i go wrong sir ?
When you have capitalised the additional $5,000, how many more years has this machine got to live?
The depreciation on the original $25,000 is still $6,250 and the depreciation on the additional $5,000 is $2,500 giving a total of $8,750
OK?
But the useful life of the drilling machine isn’t stated in the question. So how do you know that the depreciation on the additional $5000 is $2500.
$2500 represents 2 years of depreciation. Could you explain sir ?
What’s the useful life if you’re given this information?
“and depreciated it at 25% per annum on a straight line basis.”
The drilling machine was already 2 years old when we spent that additional $5,000 so there’s only 2 more years of life left
OK?
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