Priceless Products Ltd purchased some display stands for $5,000.They were modified to make them suitable for the premises at a further cost of $1,500.The expected life of the stands is 20 years,but Priceless Products expects to replace them in 5 years' time as the style of product presentation will change in that time.The stands are expected to have a zero salvage value in either case.The benefits from the stands are expected to be derived evenly over their life.Priceless Products reviewed the useful life of the stands as part of the process of assessing the amount to be depreciated in year 4 and decided that they could be used for an additional 2 years.The recoverable amount at that time is close to the net book value of the stands after depreciation is recorded for the 4th year.What is the amount of depreciation charge in years 3 and 5?

Question

Quizplus · Accepted Answer

The initial cost of the stands is $6,500 ($5,000 + $1,500). The stands were initially expected to be used for 5 years, so the annual depreciation for the first 3 years is $1,300 ($6,500 / 5). After reviewing the useful life in year 4, the remaining life is extended by 2 years, making it 3 years remaining (5 - 4 + 2). The net book value at the end of year 4 is $2,600 ($6,500 - 4 * $1,300). The new annual depreciation from year 5 is $650 ($2,600 / 4).

Priceless Products Ltd Purchased Some Display Stands for $5,000