Question

In: Accounting

Chambers plc purchased a piece of equipment for €36,000. It estimated a 6-year life and €6,000...

Chambers plc purchased a piece of equipment for €36,000. It estimated a 6-year life and €6,000 residual value. Thus, straight-line depreciation €5,000 per year. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new residual value to be €2,000. What will be the revised depreciation?

Expert Solution

Solution :

Step 1:

Calculation of depreciation already charged for two years :

Purchase cost of equipment = € 36,000

Residual value = € 6,000

Depreciation per year = € 5,000

Accumulated depreciation for 2 years

= 2 years * € 5,000

=€ 10,000

Step 2 : calculation of depreciation to be charged in third year based on new estimation of asset life and salvage value

Revised value of Depreciation per year = ( purchase cost of asset - salvage value ) / life in years

= ( € 36,000 - € 2,000 ) / 10

= € 34,000 / 10

= € 3,400 per year.

Step 3 : calculation of depreciation to be charged in third year.

= total depreciation for 3 years - depreciation already charged in last 2 years

= ( 3 * € 3,400 ) - ( 2* € 5,000 )

= € 10,200 - 10,000

= € 200

Alternative approach :

Current year depreciation of € 3,400 will be adjusted with excess value of depreciation charged in last two years based on new estimation.

Excess depreciation charged in last two years

= depreciation on previous estimation - depreciation on new estimation

=( € 2 * 5,000 ) - ( € 2 * 3,400 )

= € 10,000 - € 6,800

= € 3,200

In current year depreciation amount, this excess depreciation charged in last years will be adjusted.

Revised value of current year depreciation

= € 3,400 - € 3,200

= € 200

Answer : the revised value for depreciation to be charged at end of year 3 will be € 200.

Finish

ekkarill92 answered 2 years ago

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