Gray Ltd purchased a machine on 1 April 20X2 for GHS 16,000. In the years ended 31 March 20X3 and 31 March 20X4, Gray Ltd depreciated the machine at 25% per annum on a straight-line basis. On April 20X4, the machine was revalued to GHS 12,000 with its estimated useful life being unchanged. In accordance with IAS 16 Property, Plant and Equipment, what was the effect of this revaluation on Gray Ltd’s profit for the year ended 31 March 20X5?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
- Gray Ltd purchased a machine on 1 April 20X2 for GHS 16,000. In the years ended 31 March 20X3 and 31 March 20X4, Gray Ltd
depreciated the machine at 25% per annum on a straight-line basis. On April 20X4, the machine was revalued to GHS 12,000 with its estimated useful life being unchanged.
In accordance with IAS 16 Property, Plant and Equipment, what was the effect of this revaluation on Gray Ltd’s profit for the year ended 31 March 20X5?
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