Question

A transportation company purchased a passenger bus for $100,000 on January 1, year 1. The company expects the bus to be used for 20 years if it follows a maintenance schedule of replacing the engine after 10 years and replacing the seats every eight years. It estimates that the current cost to replace the engine is $25,000 and the current cost to replace the seats is $10,000. The company uses straight-line depreciation and the bus has no residual value. The company considers any component equal to or greater than 10% of the overall cost to be significant. Under IFRS, how much depreciation expense should the company recognize for the bus for the year ended December 31, year 1? A. $5,000 B. $7,000 C. $7,250 D. $8,500

Answer 1

$7,000

Step-by-step explanation:

Given:

Value of bus = $100,000

Expected life of bus = 20 years

Value of engine = $25,000

Expected life of engine = 10 years

Value of Seats = $10,000

Expected life of Seat = 8 years

Depreciation = Value of commodity / Expected life

A. Value of bus excluding engine and seats

= $100,000 - $25,000 - $10,000

= $65,000

Depreciation of bus = $65,000 / 20

= $3,250

B. Depreciation of engine :

= $25,000 / 10

= $2,500

C. Depreciation of seats :

= $10,000 / 8

= $1,250

Total Deprecation = ($3,250 + $2,500 + $1,250)

= $7,000