i. An equipment costing RM50,000 and residual value of RM2,000 was acquired on 1 January 2009 and depreciated on a straight-line basis over 10 years. As at 1 January 2011, the remaining life of the equipment was revised to 6 years with no residual value.
Discuss the appropriate accounting treatment for the following transactions in accordance with MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors:
1. Acquisition of equipment costing RM50,000:
The initial acquisition of the equipment should be recorded as a fixed asset with a cost of RM50,000. The cost of the equipment will be allocated over its estimated useful life, which was initially 10 years.
2. Depreciation expense for the year ending 31 December 2010:
The depreciation expense is calculated using the straight-line method, which means that an equal amount of depreciation is recognized each year over the estimated useful life. Therefore, the depreciation expense for the year ending 31 December 2010 would be RM50,000 divided by 10 years, resulting in RM5,000.
3. Revision of the remaining life and elimination of residual value as of 1 January 2011:
When there is a change in the estimate of the remaining useful life of an asset, the change is considered a change in accounting estimate. In this case, the remaining life of the equipment was revised to 6 years, with no residual value.
The revised estimate should be applied prospectively, meaning that the remaining depreciable amount (RM48,000) should be allocated over the revised remaining useful life of 6 years, resulting in an annual depreciation expense of RM8,000 (RM48,000 divided by 6 years).
It is important to note that the revision of the remaining life and elimination of residual value should be accounted for in the accounting period in which the change occurs and in any future periods affected by the change.
4. Disclosure in the financial statements:
According to MFRS 108, any changes in accounting estimates should be disclosed in the financial statements. This includes disclosing the nature of the change and the amount of the change that relates to the current period and any future periods. The disclosure should also include the reasons for the change and its effect on the financial statements.