A business purchased an asset on 1 January 20X0 at a cost of $40,000. The asset had an expected life of eight years and a residual value of $10,000. The straight-line method is used to measure depreciation. The financial year ends on 31 December.
At 1 Jan 20X2, the estimated remaining life of the asset from that date is now expected to be only four more years, but the residual value is unchanged.
What will be the net book value of the asset as at 31 December 20X2, for inclusion in the statement of financial position?
Answer
Original annual depreciation = $(40,000 – 10,000)/8 years = $3,750 per year.
| $ | |
| Cost | 40,000 |
| Accumulated depreciation to 31 December 20X1 (2 years x $3,750) | (7,500) |
| Carrying amount at 1 January 20X2 | 32,500 |
| Residual value | (10,000) |
| Remaining depreciable amount as at 1 January 20X2 | 22,500 |
Remaining life from 1 January 20X2 = 4 years
Annual depreciation = $22,500 /4 years = $5,625.
Net book value (carrying amount at 31 December 20X2) = $32,500 – $5,625 = $26,875.