Chat with AIExam 5: Depreciation of Property, Plant and Equipment
Explain why the combined cost of acquiring land and building is required to be apportioned to each specific asset and accounted for separately as per IAS 16?
What aspects of this provision is presumed inconsistent with the manager's view under Positive Accounting Theory?
(81) 
VerifiedWhere land and buildings are acquired together,IAS 16 paragraph 58 requires that the cost be apportioned between the land and the buildings,and that the buildings be systematically depreciated over time.Land itself would not usually be depreciated,given its usually indefinite life.Company directors have been known to complain about having to depreciate buildings on the grounds that buildings' value typically increases over time.This argument,however,is invalid.Generally,it is the land that increases in value,not the buildings.Buildings have a limited useful life and this must be recognised through depreciation charges.Again,it should be emphasised that directors must depreciate their buildings under existing accounting standards.Electing not to depreciate buildings (and therefore failing to act in compliance with IAS 16)will have the effect of increasing the profits and total assets of the firm.The recognition of building depreciation will increase expenses (depreciation expense)and therefore reduce profits.It will also lead to a reduction in net assets.Assets and profits are frequently used within some of the accounting-based ratios used in debt covenants.Building depreciation will increase debt-to-equity ratios,reduce times interest covered ratios and reduce profit available for dividends.Therefore,managers facing possible debt covenant violations are less likely to want to comply with IAS 16.
Discuss how the useful life of a depreciable asset is determined.
(87) VerifiedIn determining useful life,IAS 16 provides some useful guidance.Paragraph 56 states:
The future economic benefits embodied in an asset are consumed by an entity principally through its use.However,other factors,such as technical or commercial obsolescence and wear and tear while an asset remains idle,often result in the diminution of the economic benefits that might have been obtained from the asset.Consequently,all the following factors are considered in determining the useful life of an asset:
a)expected usage of the asset.Usage is assessed by reference to the asset's expected capacity or physical output.
b)expected physical wear and tear,which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme,and the care and maintenance of the asset while idle.
c)technical or commercial obsolescence arising from changes or improvements in production,or from a change in the market demand for the product or service output of the asset.
d)legal or similar limits on the use of the asset,such as the expiry dates of related leases.
Red Enterprises purchased a vehicle for €35 000.A further €5000 was spent to prepare it for use.The useful life of the vehicle is expected to be 15 years,but Red Enterprises expects to replace it with a better model in 7 years' time.The salvage value is estimated to be €6500 after 15 years and €15 000 at the end of 7 years.What is the depreciation for the first 2 years using the declining-balance method of depreciation (rounded to the nearest euro)?
(88) VerifiedA
Cutting Edge Plc purchased a state of the art hedge trimming tractor for a contract to maintain country roadside hedges for a local council.The manufacturer of the tractor stated in marketing material that the tractor is able to trim 700 000 kilometres of hedges in its operating life.Cutting Edge believes that the particularly woody type of hedges they have been contracted to maintain means that the life of the tractor is likely to be 15% less than the manufacturer specified.The tractor cost €100 000 and is expected to have a salvage value at the end of its useful life of €30 000.The tractor trimmed 60 000 kilometres this period.What is the depreciation charge this period (rounded to the nearest euro)?
(80) The depreciation rate and useful lives of assets should not be revised during the depreciable life of the asset.
(86) Which of the following statement is applicable to the straight-line method of depreciation?
(74) Yellow Plc purchased an asset 6 years ago for €75 000.At that time it was deemed to have a residual value of €15 000 and estimated useful life of 6 years.After 4 years of use the asset was overhauled at a cost of €35 000.The overhaul extended the useful life of the asset by 4 more years but reduced its residual value to €7000.Assuming the straight-line method of depreciation is applied,calculate the depreciation expense in the year after the overhaul (rounded to the nearest euro)?
(83) In accordance with IAS 16,how should a company treat additions,major repairs and improvements and replacements?
(78) Discuss the criticisms on depreciation of non-current assets under the historical cost of accounting in periods of rising prices.
(87) The company recently acquired factory equipment.Which of the following costs should be included in the depreciable amount of the equipment?
(78) Explain how different methods of cost apportionment may unrealistically provide high values for non-current assets.
(81) Boysone Plc has constructed a piece of complex equipment to be used in its updated production facility.The construction took a year to complete and although the equipment was ready for use,the rest of the facility was not completed and so the equipment was not put into use for another 6 months; that is,on 1 July 2013.The cost of constructing the equipment was £70 000 and it is expected to have an operating life of 12 years.It is very likely to be technologically obsolete in 10 years.It is expected to have a scrap value at the end of its life (at whatever time)of £5000.The expected pattern of benefits derived from the equipment is uniform throughout its life.What is the amount of depreciation to be charged in the year ending 31 December 2013 (rounded to the nearest pound)?
(94) Which of the following statements is applicable to the declining-balance method of depreciation?
(90) The depreciable amount is the historical cost of the non-current asset,or revalued amount substituted for historical cost in the financial report,less the net amount expected to be recovered on disposal of the asset at the end of its useful life.
(68) In accordance with IASB 16,the residual value and useful life of an asset shall be reviewed:
(88) Where an asset is revalued,the treatment of depreciation is to:
(74) When an asset has a defined life,and it is expected that it will be used uniformly,which depreciation policy is likely to be used?
(90) What issues need to be addressed to determine how to allocate the cost of an asset?
(87) Crows Plc purchased a photocopier on 1 July 2012 for £30 000.It was estimated that it would have a useful life of 3 years and produce 5 000 000 copies over its life.The asset's residual value is estimated at £3000.Other similar assets are depreciated on a reducing balance method is at 40% rate.Which of the following statement is correct for year ending 30 June 2013?
(84) 
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