ExpertMedium2 marksMultiple Choice
ACCA · Question 02 · Tangible Non-Current Assets
Section A
Cobalt Extraction Co operates a deep-sea mining vessel. The vessel cost $50 million and has a useful life of 20 years. By law, the vessel must undergo a major environmental safety overhaul every 5 years. The estimated cost of the first overhaul is $10 million, which was included in the initial $50 million cost.
What is the total depreciation charge for the vessel in its first year of operation?
Section A
Cobalt Extraction Co operates a deep-sea mining vessel. The vessel cost $50 million and has a useful life of 20 years. By law, the vessel must undergo a major environmental safety overhaul every 5 years. The estimated cost of the first overhaul is $10 million, which was included in the initial $50 million cost.
What is the total depreciation charge for the vessel in its first year of operation?
Answer options:
A.
$2.5 million
B.
$3.0 million
C.
$4.0 million
D.
$4.5 million
How to approach this question
Apply IAS 16 component depreciation. Separate the overhaul cost from the main asset cost and depreciate each over their respective useful lives.
Full Answer
C.$4.0 million✓ Correct
Under IAS 16 Property, Plant and Equipment, significant components of an asset must be depreciated separately over their specific useful lives. The $10m overhaul is depreciated over 5 years ($2m/year). The remaining $40m is depreciated over 20 years ($2m/year). Total = $4.0m.
Common mistakes
Failing to componentize and simply dividing $50m by 20 years.
Practice the full ACCA FR — Financial Reporting Practice Exam 4
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