Question

On January 1, 2016, D Company acquires for $100,000 a new machine with an estimated useful life of 10 years and no residual value. The machine has a drum that must be replaced every five years and costs $20,000 to replace. The company uses straight-line depreciation. Under IFRS, what is depreciation for 2016?

a) $10,000.
b) $10,800.
c) $12,000.
d) $13,200.

Answer 1

The depreciation for 2016 under IFRS is $10,000.

Step-by-step explanation:

To calculate the depreciation for 2016 under IFRS, we need to determine the annual depreciation expense for the machine and the drum replacement cost. The machine's cost ($100,000) is divided by its useful life (10 years), which gives an annual depreciation expense of $10,000. The drum replacement cost is incurred every 5 years, so for the first 5 years, there is no drum replacement cost. Therefore, the depreciation for 2016 is $10,000. Option a) $10,000 is the correct answer.