XYZ Ltd operate two production lines. One was installed in April 2018 at a cost of €200,000. The other was installed in February 2020 at a cost of €340,000.

XYZ Ltd operate two production lines. One was installed in April 2018 at a cost of €200,000. The other was installed in February 2020 at a cost of €340,000. They charge depreciation using the straight-line method at a rate of 15% pa for an estimated useful economic life of 5 years, charging a full year in the year of acquisition.

As at the year ended 31 Dec 2021, the production manager has filed a report noting that although the line continues to work effectively, the machinery involved has been superseded by latest generation technology, and as such the residual value is now expected to be 5% of original cost. The CFO wants to consider including this change in the accounts for the year ending 31 Dec 2021.

a) Calculate the annual depreciation rate had the residual value of 5% been used from the point of acquisition? (1 mark)

b) What was the Net Book Value of the production lines as at 31 Dec 2020? (3 marks)

c) What would be the Net Book Value of the production lines as at 31 Dec 2021 if rebasing the depreciation to the rate computed in part a)? (2 marks)

d) What should be the depreciation charge for the year ended 31 Dec 2021 if including the changes? (2 marks)

Expert Solution

a.

Cost of assets	100.00%
Less: Residual value	5.00%
Depreciable value	95.00%
Useful life in years	5.00
Annual depreciation rate	19.00%

b.

	Product line 1	Product line 2
Cost	€2,00,000.00	€3,40,000.00
Depreciation per year	€ 30,000.00	€ 51,000.00
No. of years used till 31-12-2020	3.00	1.00
Total depreciation	€ 90,000.00	€ 51,000.00
Net Book value as on 31-12-2020	€ 1,10,000.00	€ 2,89,000.00

c.

	Product line 1	Product line 2
Cost	€2,00,000.00	€3,40,000.00
Depreciation per year	€ 38,000.00	€ 64,000.00
No. of years used till 31-12-2020	3.00	1.00
Total depreciation	€ 1,14,000.00	€ 64,000.00
Net Book value as on 31-12-2020	€ 86,000.00	€ 2,75,400.00

	Product line 1	Product line 2
Book value as on 31-12-20
Based on original rate	€1,10,000.00	€2,89,000.00
Based on new rate	€ 86,000.00	€ 2,75, 400.00
Additional depreciation to be provide	€ 24,000.00	€ 13,600.00
Depreciation for 2021 based on new rate	€ 38,000.00	€ 64,600.00
Depreciation charge for 31-12-21	€ 62,000.00	€ 78,200.00

d.

The materiality of the item effect of the change in net income.

a. Annual depreciation rate 19.00%.

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