Property, plant & equipment IAS 16

This topic has 7 replies, 2 voices, and was last updated 5 years ago by MikeLittle.

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January 22, 2017 at 12:04 pm #368864
Anuja Nair
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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
= 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
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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
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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
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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
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The useful life is 4 years, i get it now sir. Thank you.
January 24, 2017 at 10:20 am #369245
MikeLittle
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You’re welcome
January 29, 2017 at 2:39 pm #370134
Anuja Nair
- Topics: 365
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Can i just take
($12500 +$5000) x 1/2 years
= $8750 ?
January 29, 2017 at 3:09 pm #370137
MikeLittle
Keymaster
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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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