Lusaka Rock buster has recently purchased an item of earth moving plant at a total cost of K24 million. The plant has an estimated life of 10 years with no residual value, however its engine will need replacing after every 5,000 hours of use at an estimated cost of K7.5 million. The directors of Lusaka Rock buster intend to depreciate the plant at K2-4 million (K24 million/10 years) per annum and make a provision of K1, 500 (K7-5 million/5,000 hours) per hour of use for the replacement of the engine. Required: Explain how the plant should be treated in accordance with International Accounting Standards and comment on the Directors' proposed treatment.
Lusaka Rock buster has recently purchased an item of earth moving plant at a total cost of K24 million. The plant has an estimated life of 10 years with no residual value, however its engine will need replacing after every 5,000 hours of use at an estimated cost of K7.5 million. The directors of Lusaka Rock buster intend to depreciate the plant at K2-4 million (K24 million/10 years) per annum and make a provision of K1, 500 (K7-5 million/5,000 hours) per hour of use for the replacement of the engine. Required: Explain how the plant should be treated in accordance with International Accounting Standards and comment on the Directors' proposed treatment.
Chapter11: Long-term Assets
Section: Chapter Questions
Problem 6PA: Gimli Miners recently purchased the rights to a diamond mine. It is estimated that there are one...
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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