QUESTION 1

A machine tool with an original cost of 100,000, an originally estimated useful life of 10 years

and an originally estimated residual value of nil. The annual straight line depreciation charge

will be 10,000 per annum and the carrying amount after three years will be 70,000. In the

fourth year it is decided that as a result of changes in market conditions the remaining useful

life is only three years (so a total of six years).

QUESTION 2

CAE, Inc. is an airline that owns an XYZ aircraft that it bought in 2012 for $300 million. At

the time of recognition of the aircraft as a fixed asset, i.e. on 1 January 2013, the company

estimated its useful life to be 15 years and expected it to fetch $50 million at the end of its

useful life. The company uses straight-line depreciation method for the aircraft. Regulatory

changes introduced in November 2019 barred the company from flying this aircraft after the

end of 2021. The company cannot fly it on any alternate route either. The management is forced

to sell it and acquire an upgrade aircraft by end of 2021. It revised the useful life of the aircraft

down to 10 years and increased its salvage value to $90 million.

Illustrate how the company will account for the developments in financial year ending 31

December 2019.