An entity purchased an asset on 1 January 2016 for GHC 100,000. The asset has a useful life of 10 years and uses the straight-line method of depreciation. On 1 January 2019, the asset’s useful life is revised to add a further two (2) years to it. The asset has no residual value. The depreciation charge for the year to 31 December 2019 should bea.GHC 8,000b.GHC 10,000c.GHC 12,000d.GHC 5,000
Question
An entity purchased an asset on 1 January 2016 for GHC 100,000. The asset has a useful life of 10 years and uses the straight-line method of depreciation. On 1 January 2019, the asset’s useful life is revised to add a further two (2) years to it. The asset has no residual value. The depreciation charge for the year to 31 December 2019 should bea.GHC 8,000b.GHC 10,000c.GHC 12,000d.GHC 5,000
Solution
To answer this question, we need to first understand how the straight-line method of depreciation works. This method spreads the cost of the asset evenly over its useful life.
Step 1: Calculate the annual depreciation before the revision of the useful life. The cost of the asset is GHC 100,000 and it has a useful life of 10 years. So, the annual depreciation is GHC 100,000 / 10 = GHC 10,000.
Step 2: Calculate the total depreciation from 1 January 2016 to 31 December 2018. The asset has been depreciated for 3 years (2016, 2017, and 2018). So, the total depreciation is GHC 10,000 * 3 = GHC 30,000.
Step 3: Calculate the carrying amount of the asset on 1 January 2019. The carrying amount is the cost of the asset minus any accumulated depreciation. So, the carrying amount is GHC 100,000 - GHC 30,000 = GHC 70,000.
Step 4: Calculate the new annual depreciation after the revision of the useful life. The remaining useful life of the asset is now 10 - 3 (original useful life - years already depreciated) + 2 (additional years) = 9 years. So, the new annual depreciation is GHC 70,000 / 9 = GHC 7,778. This value is rounded to the nearest thousand, so the depreciation charge for the year to 31 December 2019 should be GHC 8,000.
So, the correct answer is a. GHC 8,000.
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