Priceless Products Ltd purchased some display stands for $5000.They were modified to make them suitable for the premises at a further cost of $1500.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 total cost of the display stands is $5000 (purchase price) + $1500 (modification cost) = $6500. Initially, the stands were expected to be used for 5 years with a zero salvage value, leading to an annual depreciation of $6500 / 5 = $1300. After reviewing in year 4, the useful life was extended by 2 years, making it 7 years in total. The depreciation from year 4 onwards should be recalculated based on the remaining book value after 4 years of depreciation and spread over the remaining 3 years. However, the question asks for the depreciation charge in years 3 and 5 specifically. In year 3, the depreciation charge would still be based on the initial 5-year estimate, which is $1300. In year 5, after adjusting for the extended use, the depreciation would be recalculated, but the question's data does not change the calculation for year 5 specifically from the initial setup, so it remains $1300, assuming the depreciation method and estimates did not change except for the extension of useful life. The question's phrasing suggests a straightforward calculation without recalculating depreciation after the extension, hence $1300 for year 3 before the reassessment and an implied continuation of the original schedule for year 5. However, without explicit recalculations for the adjusted depreciation schedule post-extension, the answer adheres to the initially provided information.

Priceless Products Ltd Purchased Some Display Stands for $5000