Question

On January 1, year 1, a company purchased equipment for $100 million. The equipment consists of four major components, of which two components comprise 80% of the total cost and each has a 20-year useful life. The remaining two components have costs of $10 million each; one of them has a useful life of four years, and the other has a useful life of five years. The company applies the cost model to the equipment and uses the straight-line method of depreciation. Under IFRS, what is the depreciation expense for the year ended December 31, year 1?

Answer 1

$8.5 million

Step-by-step explanation:

On January 1, year 1, a company purchased equipment for $100 million.

The equipment consists of four major components, of which two components comprise 80% of the total cost and each has a 20-year useful life.

The remaining two components have costs of $10 million each; one of them has a useful life of four years, and the other has a useful life of five years.

Straight-line method of depreciation is given by the formula: Cost / Number of years

COMPONENT 1 2 3 4

COST 40M 40M 10M 10M

YEARS 20 20 4 5

DEPRECIATION 2M 2M 2.5M 2M

Therefore Total depreciation cost for year 1 = 2+2+2.5+2 = $8.5 million