Chat with AIExam 5: Depreciation of Property, plant and Equipment
A company recently ordered a piece of machinery from Germany to be used to manufacture a new product.Which of the following are generally included as cost of an item of property,plant and equipment in accordance with AASB 116?
Purchase price
Import duties
Share of fixed overhead costs
Cost of marketing the new product
(85) 
VerifiedA
A non-current asset,for example,a building,has the following information available for valuation at balance date:
Depreciable amount $50 000
Accumulated depreciation $10 000
Residual value $5 000
Recoverable amount $35 000
Value in use $80 000
Which amount should be the carrying amount of this asset at balance date?
(67) VerifiedB
If a company finds out years later that the expected pattern of consumption of future economic benefits of an asset had changed,how must a company deal with this accounting issue?
(79) 
Answered by Examlex AI CopilotIf a company discovers that the expected pattern of consumption of future economic benefits of an asset has changed from its initial estimates, it must adjust the accounting for that asset accordingly. This situation typically arises in the context of depreciation or amortization of long-lived assets.
Here's how a company should deal with this accounting issue:
1. **Review and Revise Estimates**: The company should review the remaining useful life, salvage value, and the pattern in which the asset's economic benefits are expected to be consumed. This review should be based on the most current information available.
2. **Change in Accounting Estimate**: A change in the expected pattern of consumption of an asset is considered a change in accounting estimate. According to accounting standards such as International Accounting Standard (IAS) 16 for property, plant, and equipment, or IAS 38 for intangible assets, changes in accounting estimates are accounted for prospectively.
3. **Prospective Adjustment**: The company should adjust the depreciation or amortization expense prospectively over the asset's remaining useful life. This means that the company does not need to make any adjustments to the financial statements for prior periods. Instead, the depreciation or amortization expense is recalculated from the date of the change in estimate going forward.
4. **Disclosure**: The company should disclose the nature and effect of a change in an accounting estimate in the notes to the financial statements. This disclosure should include the reason for the change and, if possible, the effect on the current and future periods.
5. **Financial Statement Impact**: The impact of the change will be reflected in the income statement through a change in the depreciation or amortization expense. This could potentially affect the company's net income and earnings per share. The carrying amount of the asset on the balance sheet will also be adjusted accordingly.
6. **Tax Implications**: The company should also consider the tax implications of changing the depreciation or amortization method, as this may affect the timing of tax deductions.
7. **Internal Controls and Policies**: The company should review and update its internal controls and accounting policies to ensure that they reflect the new estimates and that similar assets are reviewed regularly for changes in consumption patterns.
It's important to note that the specific requirements for accounting for a change in the pattern of consumption of an asset's benefits can vary depending on the accounting framework being used, such as Generally Accepted Accounting Principles (GAAP) in the United States, International Financial Reporting Standards (IFRS), or other local standards. Companies should consult the relevant accounting standards and possibly seek advice from accounting professionals to ensure compliance.
Under the declining balance method of depreciation,the depreciable amount of an asset is determined by deducting residual value from cost or revalued amount.
(66) Depreciation represents a decline in the market value of an asset over its life.
(77) In accordance with AASB 116,the residual value and useful life of an asset shall be reviewed:
(89) French Co Ltd has a machine with the following characteristics:
A more technically advanced machine is expected to be available in 8 years.
It is expected to continue operating efficiently for the next 13 years.
The product that the machine is used to produce is expected to have a viable market for the next 6 years.
What is the period of time that should be used as the useful life of the asset for the purpose of calculating depreciation?
(77) Depreciation of an asset is required when market value accounting is applied on a non-current asset.
(82) Priceless Products Ltd purchased some display stands for $5000.They were modified to make them suitable for the premises at a further cost of $1500.The expected life of the stands is 20 years,but Priceless Products expects to replace them in 5 years' time as the style of product presentation will change in that time.The stands are expected to have a zero salvage value in either case.The benefits from the stands are expected to be derived evenly over their life.Priceless Products reviewed the useful life of the stands as part of the process of assessing the amount to be depreciated in year 4 and decided that they could be used for an additional 2 years.The recoverable amount at that time is close to the net book value of the stands after depreciation is recorded for the 4th year.What is the amount of depreciation charge in years 3 and 5?
(88) Discuss the criticisms on depreciation of non-current assets under the historical cost of accounting in periods of rising prices.
(86) 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?
(70) Cutting Edge Ltd 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 dollar)?
(69) Where a non-current asset appreciates in value over time,no depreciation should be charged.
(82) AASB 116 requires disclosure of a reconciliation of the carrying amount at the beginning and end of the period for depreciable assets.This reconciliation includes:
(85) Crows Ltd 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?
(71) Boysone Ltd 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 dollar)?
(88) AASB 116 paragraph 73 states that financial statements shall disclose,for each class of property,plant and equipment the measurement bases used for determining the net carrying amount.
(69) Managers often argue that property values appreciate and therefore depreciation is irrelevant.Discuss the contractual implications of building depreciation to debt covenants in place.
(75) A company recently replaced a significant part of equipment carried at cost.Which action would be consistent with AASB 116?
(85) 
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