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Property, plant & equipment IAS 16

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Property, plant & equipment IAS 16

  • This topic has 7 replies, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • January 22, 2017 at 12:04 pm #368864
    Anuja Nair
    Member
    • Topics: 365
    • Replies: 353
    • ☆☆☆☆

    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
    = 12500

    Carrying value at 30 september 20X7
    = 25000 – 12500
    = 12500

    Capitalize $5000

    Therefore, depreciation from 30 September 20X7 to 30 September 20X8
    = (12500+5000) x 25%
    = 4375

    But the answer key states that the answer is 8750. Where did i go wrong sir ?

    January 23, 2017 at 5:48 pm #369074
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    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?

    January 24, 2017 at 3:08 am #369138
    Anuja Nair
    Member
    • Topics: 365
    • Replies: 353
    • ☆☆☆☆

    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 ?

    January 24, 2017 at 8:45 am #369197
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    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?

    January 24, 2017 at 9:10 am #369228
    Anuja Nair
    Member
    • Topics: 365
    • Replies: 353
    • ☆☆☆☆

    The useful life is 4 years, i get it now sir. Thank you.

    January 24, 2017 at 10:20 am #369245
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    You’re welcome

    January 29, 2017 at 2:39 pm #370134
    Anuja Nair
    Member
    • Topics: 365
    • Replies: 353
    • ☆☆☆☆

    Can i just take
    ($12500 +$5000) x 1/2 years
    = $8750 ?

    January 29, 2017 at 3:09 pm #370137
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    Yes – that’s exactly the same as 1/4 x $25,000 + 1/2 x $5,000

    But if you want to take 1/2 x ($12,500 + $5,000) that’s no problem

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