Assume that In 2014 Spar made a profit of £2,000000 before deprecation. The comp

Question

Assume that In 2014 Spar made a profit of £2,000000 before deprecation. The company has £20,000000 worth of equipment. Currently, it using the straight line method to depreciate its equipment over 10 years. However, the company is thinking to change its depreciation policy by to 20 years estimated useful life instead of 10 years. A. Do you think this change will affect the company’s profit? Explain your answer using the calculation to show the profit before and after the change. If there was an effect on company’s profit, what is the amount of the change.

Explanation / Answer

Calculation to show the profit before and after the change Particulars Useful Life - 10 years Useful Life - 20 years Profit Before Depreciation £                     2,000,000 £                 2,000,000 (-)Depreciation £                     2,000,000 £                 1,000,000 (20,000,000/10) (20,000,000/20) Profit After Depreciation £ 0   £                 1,000,000 *Since the depreciation amount for the year would change when there is a revision of useful life of asset and as a result profit will change accordingly *The amount of change in profit due to revision of useful life of the asset is £ 1,000,000

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