A machine cost £60,000 and was depreciated straight-line over 10 years with no residual value. After 4 years the useful life is re-estimated and the machine is expected to last a further 8 years from that date, still with no residual value. What is the annual depreciation charge from year 5 onwards?

Answer and explanation

Correct answer: C. £4,500

  1. Step 1: Accumulated depreciation after 4 years = 4 × £6,000 = £24,000, so carrying amount = £36,000.
  2. Step 2: A change in useful life is a change in accounting estimate under IAS 8 and is applied prospectively, with no restatement of earlier years.
  3. Step 3: New charge = £36,000 ÷ 8 years = £4,500 per year.
Answer
£4,500.
Why not the others: £6,000: This continues the original charge, though IAS 8 requires a change in estimate to be applied to the carrying amount from the date of the change. £7,500: This divides the original cost by 8, ignoring the £24,000 already depreciated. £3,600: This divides the carrying amount of £36,000 by 10 years, the original total life, instead of the revised remaining life of 8 years.

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A machine cost £60,000… | ACCA Applied Knowledge (BT, MA, FA)