ACCA/CAT

Answer: B

●Accounting for depreciation: - whichever method is used to calculate depreciation, the accounting remains the same:

Journal entry is:

Dr. Depreciation

Cr. Accumulated Depreciation ( provision for depreciation)

Accumulated depreciation account is cumulative, i.e. reflects all depreciations to date.

Cost　　　　　　　　　　　　X

Accumulative Depreciation (X)

NBV　　　　　　　　　　　　 X

●Consistency and subjectivity when accounting for depreciation:

- The following are all based on estimates made by the management of a business:

Depreciation method

Residual value

Useful life

- Different estimates would result in varying levels of depreciation, and

consequently, profits.

- It can be argued that these subjective areas could therefore result in manipulation of the accounts by management.

- In order to reduce the scope for such manipulation and increase consistency of treatment, IAS 16 Property, Plant and Equipment requires the following:

depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of the use of the asset.

residual value and useful life should be reviewed at each year end and changed if expectations differ from previous estimates.

Ex 3. A purchased a non-current asset for $100,000 on 1 January 20x2 and started depreciating it over 5 years. Residual value was taken as $10,000.

At 1 January 20x3, a review of asset lives was undertaken and the remaining useful life was estimated at 8 years. Residual value was estimated nil.

Calculate the depreciation charge for the year ended 31 December 20x3 and subsequent years.

Solution:

Initial depreciation charge (100,000-10,000)/5 = 18,000

NBV at date of charge: 100,000-18,000 = 82,000

New depreciation charge: 82,000/8 = 10,250

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