CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
A company buys equipment for 500,000 with a 5-year life, no salvage value, and straight-line depreciation. It also incurs 50,000 of interest during construction of the asset that is eligible for capitalization under IFRS. At year-end of year 1, the carrying amount of the asset is closest to:
The carrying amount is about 440,000. Eligible borrowing costs are capitalized, giving a cost of 550,000. Straight-line depreciation over five years is 110,000 per year, leaving 440,000 after the first year.
- A440,000Correct
- B450,000
- C495,000
Explanation
Capitalized cost = 500,000 + 50,000 = 550,000. Annual depreciation = 550,000/5 = 110,000. Carrying amount = 550,000 - 110,000 = 440,000. Option 450,000 omits the interest from depreciation base partly (500,000 - 50,000 error).
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