Practice Questions: IAS 16 (Property Plant and Equipment)

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Example 1

 Asset X was bought for €500,000 five years ago and has been depreciated at 10% on cost per annum. It is now revalued at €800,000. There is no change to the useful life.
Required: Revaluation and Double entries

Example 2

 An item of PPE was purchased for $900,000 on 1 January 2007. It is estimated to have a useful life of 10 years and is depreciated on a straight-line basis. On 1 January 2009, the asset is revalued to $960,000. The useful life remains unchanged at ten years.
Required: Revaluation and Double entries

Example 3

AB Ltd. is a private limited company that operates an aircraft. The aircraft was acquired on 1 January 2001. The details of the cost of the aircraft’s components are as follows:
Component at cost ($ million)
Depreciation basis
Exterior Structure 600
25 years straight–line
Cabins fittings      300
12 years straight–line
Engine                  200
40,000 hours
  • In the year ended 31 December 2008 the aircraft engine had experienced a serious trouble which had resulted in considerable compensation costs to AB Ltd. 
  • The aircraft log showed that existing engine has used 30,000 hours up to 31 December 2008. At the start of January 2009 a decision was taken to replace the engine at a cost of $280 million, due to the unreliability of the old engine. The expected life of the new engine is 50,000 hours and in the year ended 31 December 2009 the aircraft had used its engines for 5,000 hours. 
  • At the same time the engine was replaced, the company took the opportunity to upgrade the cabin facilities at a cost of $120 million and the exterior structure was repainted at a cost of $40 million. After the upgrade to the cabin fittings its estimated remaining useful life was increased to five years (from the date of the upgrade).
  •  All the work on the aircraft can be assumed to have been completed on 1 January 2009. All residual values can be taken as nil.

Required 
Calculate the carrying value of aircraft at 31 December 2009 in the statement of financial position and related expense in the statement of profit or loss for the year ended 31 December 2009.


Example 4

On 1 January 20.1, the risks and rewards of ownership of a new Lear jet passed to Flight Limited. The jet, which is to provide international mobility to the company’s most senior executives, cost R40 million (excluding VAT). The company intends keeping the jet until it is obsolete (i.e. 20 years) at which time it is expected to have no residual value. Although the invoice did not provide an analysis of the purchase price, it can reasonably be allocated as follows:
 Rand Additional information:
• Engines 20,000,000                                      Estimated useful life 10 years with no residual value
• Airframe 14,000,000                                    Estimated useful life 20 years with no residual value
• Furniture and fittings   4,000,000             Estimated useful life 5 years with no residual value
• Inspection costs   2,000,000    Such inspections are required by aviation authorities every two years  
Required: Compute the amount of depreciation to be expensed by Flight Limited in respect of the jet for the year ended 31 December 20x1.

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