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This is part of a number two question in mock one in the rev kit.
Tintagel operates some heavy excavationg plant which requires a major overhaul every three years.the overhaul is estimated to cost $18m and is due to be carried out in in april 05. the provision of $12m represents two annual amts of $6m made in the yrs to 31.3.03 and 04.
this plant was purchased for $60m on 1.4.02 and is being depreciated over six yrs on the straight line basis.In the answer they have added back $10,000 (60000/6) as old depn added back and calculated a new depn of 60-18=42, 42/6=7+6=13 as total new depn.
they have also added back $6000 provision to the profit.can you explain the new depn calculation and also why they have added back $10,000 to the profit when earlier in the qstn they had stated that none of the non current assets have been depreciated for the current year.
also how can they add back a provision($6000) to profit?
Thank you.Hi
depn? the asets has two elements – one which has a 6 year life and the other has a 3 year life. the 6 year bit is worth 42 so 42 / 6 =7 depn on that part of the asset. the 3 year bit costs 18, so 18 / 3 = 6. Therefore total depn for the year is 7 + 6 = 13.
The provision should not be being built up over a period – it’s either an obligation, or it’s not. If it IS an oblign, it should be provided for in full ( pv of 18 payable in 3 years’ time ). If it isn’t an obligation, there should be no provn!
That’s why 6,000 has been added back to profits. I presume that 6 has also been added back to ret ears b/fwd.
The 10k add back is presumably the previous year’s depn being added back to the b/fwd ret ears.
i don’t have the q with me at home, so cannot be more helpful than that, sorry
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