7) Discuss the appropriate accounting treatment for the following transactions in accordance with MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors:
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
adjustment year 2011
According to MFRS 108, when there is a change in an accounting estimate, the change should be accounted for prospectively. In the case of the equipment, the change in estimated remaining useful life from 10 years to 6 years with no residual value would be considered a change in accounting estimate.
To account for this change, the company should record the new estimate of the remaining useful life (6 years) and update the depreciation expense accordingly. The carrying amount of the equipment should be depreciated over the revised remaining useful life, starting from the date of the estimate change (1 January 2011), using the straight-line method.
The new depreciation expense per year can be calculated by dividing the carrying amount of the equipment (cost minus accumulated depreciation) by the remaining useful life. For instance, if the carrying amount of the equipment as of 1 January 2011 is RM40,000 (RM50,000 original cost - RM10,000 accumulated depreciation), the new annual depreciation expense would be RM40,000 / 6 = RM6,666.67.
The journal entry to record the change in accounting estimate would be as follows:
Depreciation Expense RM6,666.67
Accumulated Depreciation RM6,666.67
ii. If there is no other information provided in the question, no adjustment is required for the year 2011. The revised remaining useful life and no residual value are applicable from 1 January 2011 onwards.