- 15 Marks
FR – L2 – Q26 – Property, Plant and Equipment
Question
(a) On July 1, 20X2, Accra Logistics Limited acquired a machine at a cost of GH¢10 million. The useful life of the machine and its salvage value was estimated at 5 years and GH¢3.0 million, respectively. The cost of machine is being depreciated under the straight line method.
Based on the practice followed by similar types of companies, the company has determined that the remaining useful economic life of the machine is six years. It has also been established that the residual value at the end of the useful life will be equal to 10% of the cost of machine.
Required
Compute the depreciation expenses and other adjustments (if any) required to be made in the financial statements of the company for the year ended June 30, 20X4 under the following assumption:
(i) the review of useful life and residual value was carried out on June 30, 20X4.
(ii) the review of useful life and residual value was carried out on June 30, 20X3 but in the financial statements for the year then ended the depreciation expense was erroneously recorded on the previous basis.
(b) Discuss the requirements of International Accounting Standard(s) in respect of estimation and revision of useful life of an item of property, plant and equipment.
Answer
(a)i If review is performed on June 30, 20X4
| Cost of machine | GH¢10,000,000 |
|---|---|
| Depreciation charged @ 20% for the year-ended June 30, 20X2 and June 30, 20X3 | |
| (GH¢10,000,000 – GH¢3,000,000) × 20% × 2 | GH¢2,800,000 |
| Carrying amount as at June 30, 20X3 | GH¢7,200,000 |
| Residual value (10% of the cost of machine) | GH¢1,000,000 |
| Depreciable amount – on July 1, 20X3 | GH¢6,200,000 |
| Remaining useful lives | 6 years |
| Depreciation charge for the year-ended June 30, 20X4 | GH¢1,033,333 |
(ii). If review is performed on June 30, 20X3
| Cost of machine | GH¢10,000,000 |
|---|---|
| Depreciation for the year-ended June 30, 20X2 | |
| (GH¢10,000,000 – GH¢3,000,000) × 20% | GH¢1,400,000 |
| Carrying amount as at June 30, 20X2 | GH¢8,600,000 |
| Residual value (10% of the cost of machine) | GH¢1,000,000 |
| Depreciable amount – on July 1, 20X2 | GH¢7,600,000 |
| Remaining useful lives | 6 years |
| Depreciation charge for the year-ended June 30, 20X4 | GH¢1,266,667 |
| Depreciation charged in the financial statement for the year-ended June 30, 20X3 | GH¢1,400,000 |
| Effect of change in estimate to be incorporated (Reversal) [GH¢1,400,000 – 1,266,667) | GH¢133,333 |
(b) IAS 16 Property, Plant and Equipment requires that the useful life and residual value of an asset be reviewed at least at each financial year-end. The useful life is the period over which an asset is expected to be available for use by an entity or the number of production units expected to be obtained from the asset. If expectations differ from previous estimates, the change is treated as a change in accounting estimate under IAS 8.
The revision should be applied prospectively, affecting the current and future periods. The carrying amount of the asset at the date of revision, less any revised residual value, is depreciated over the remaining useful life. No retrospective adjustments are made to prior periods. Disclosure is required for the nature and effect of the change in estimate, including the impact on the current period’s depreciation expense.
- Tags: Accounting Standards, IAS 16, Property Plant and Equipment, Residual Value, Useful Life
- Level: Level 2
- Uploader: Samuel Duah