Question
XYZ Ltd. purchased an asset on 1st January, 20X0, for
1,00,000 and the asset had an estimated useful life of ten years and a residual value of nil. The company has charged depreciation using the straight-line method at 10,000 per annum. On 1st January, 20X4, the management of XYZ Ltd. Reviews the estimated life and decides that the asset will probably be useful for a further four years and, therefore, the total life is revised to eight years. How should the asset be accounted for remaining years?Solution
Change in useful economic life of an asset is change in accounting estimate, which is to be applied prospectively, i.e., the depreciation charge will need to be recalculated. On 1st January, 20X4, when the asset's net book value is 60,000. The company should amend the annual provision for depreciation to charge the unamortized cost (namely, 60,000) over the revised remaining life of four years. Consequently, it should charge depreciation for the next four years at 15,000 per annum.
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