I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

146

 

Solution 

 

 

 

Depreciation 

 

Aggregate 

Year 

 

 

charge 

 

depreciation 

 

 

 

$ 

 

$ 

20X1 

 

$100,000 × 40% 

 

40,000 

 

40,000 

20X2 

 

$60,000 × 40% 

 

24,000 

 

64,000 

20X3 

$100,000 – $64,000

3

 

 

12,000 

 

76,000 

20X4 

 

 

12,000 

 

88,000 

20X5 

 

 

12,000 

 

100,000 

4.13 Change in expected useful life or residual value of an asset 

The depreciation charge on a non-current asset depends not only on the cost (or value) of the asset and 

its estimated residual value but also on its estimated useful life.  

A business purchased a non-current asset costing $12,000 with an estimated life of four years and no 

residual value. If it used the straight line method of depreciation, it would make an annual depreciation 

charge of 25% of $12,000 = $3,000.  

Now what would happen if the business decided after two years that the useful life of the asset has 

been underestimated, and it still had five more years in use to come (making its total life seven years)? 

For the first two years, the asset would have been depreciated by $3,000 per annum, so that its 

carrying amount after two years would be $(12,000  6,000) = $6,000. If the remaining life of the 

asset is now revised to five more years, the remaining amount to be depreciated (here $6,000) should 

be spread over the remaining life, giving an annual depreciation charge for the final five years of: 

Carrying amount at time of life readjustment  –  residual value

New estimate of remaining useful life

  =  

$6,000

5 years

 =  $1,200 per year