The directors of ABC Ltd are disappointed by the draft profit for the year ended 30September 2021. The company's assistant accountant has suggested a area where she believes the reported profit may be improved: A major item of plant that cost £20 million to purchase and install on 1 October2018 is being depreciated on a straight-line basis over a five-year period (assuming residual value). The plant is wearing well and at the beginning of the current year (1 October 2020) the production manager believed that the plant was likely tolast eight years in total (i.e. from the date of its purchase). The assistant accountant has calculated that, based on an eight-year life (and no residual value) the accumulated depreciation of the plant at 30 September 2021 would be £7-5 million(£20 million/8 years x 3). In the financial statements for the year ended 30September 2020, the accumulated depreciation was E8 million (£20 million/5 years× 2). Therefore, by adopting an eight-year life, ABC Ltd can avoid a depreciation charge in the current year and instead credit £0-5 million (E8 million - £7-5 million)to the income statement in the current year to improve the reported profit. 

Required:

Comment on the acceptability of the assistant accountant's suggestion and explain how they would affect the financial statements if they were implemented under IFS. Ignore taxation.

Answer rating: 100% (QA)

Answer Accounting estimate is an estimation of debit or credit amount of item for which no exact mea... View the full answer