Zac Ltd purchased an equipment for $600,000 on 1 July 2020 and depreciates the asset over 12 years. The estimated residual value is $60,000. The company adopts the revaluation model in accounting for its PP&E assets. On 30 June 2023, the management of Zac Ltd assessed the equipment as having a fair value of $510,000. What should be the depreciation expense recorded by Zac Ltd on 30 June 2024 assuming the original estimated useful life and residual value remain the same?

Question

BlackTom AI · Accepted Answer

We start by outlining the key data and the sequence of events. Zac Ltd bought equipment for 600,000 on 1 July 2020, with an estimated residual value of 60,000 and a useful life of 12 years. Under the cost model, annual depreciation would be (600,000 − 60,000) / 12 = 540,000 / 12 = 45,000 per year.

Up to 30 June 2023, three full years of depreciation have elapsed (2020/21, 2021/22, 2022/23). Total accumulated depreciation = 3 × 45,000 = 135,000. Carrying amount just before revaluation would be 600,000 − 135,000 = 465,000.

Zac Ltd uses the revaluation model for PP&E. On 30 June 2023, the fair value is 510,000. Since the carrying amount (465,000) is less than fair value (510,000), the asset is revalued upward by 45,000 to 510,000. This increases the asset’s carrying amount and typically increases equity via a revaluation surplus; depreciation going forward will be based on the updated carrying amount minus residual value, over the remaining useful life.

Remaining useful life at 30 June 2023: original 12 years less 3 years elapsed = 9 years. Residual value remains 60,000.

New depreciable base after revaluation = 510,000 − 60,000 = 450,000. Annual depreciation from 1 July 2023 to 30 June 2024 = 450,000 / 9 = 50,000.

Therefore, the depreciation expense recorded on 30 June 2024 (i.e., for the year 2023/24) should be 50,000.

Note: The provided data shows a single answer option, "$50,000". There are no additional choices to evaluate, but the reasoning above explains why this amount is correct given the revaluation and the remaining useful life under the revaluation model.

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