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February 8, 2016 at 7:21 am
thank you for comprehensive lecture on depreciation. it helped me alot understanding how to depreciate after revaluation of asset.
However, i need your help while solving question 2 of test questions. I would reproduce the question over here.
on 31 Oct 2013 machine cost is 120,000, accumulated dep. is 25000.
business sells machine for 10,000 on 1 jan 2014. this machine had orignal cost of 30,000 on 1 apr 2012.
company policy is str. line depreciation @ 20%, on monthly basis.
sir, according to my understanding from lecture, when asset was revalued it should have been divided upon remaining years of life to get depreciation expense for year. here we dont have that information so we dont know remaining life period. Secondly, if asset is sold on 1jan 2014, we dont have asset after this month so we cannot depreciate it for remaining months of financial years. but in answer it has been depreciate for remaining months of financial year as well and then the amount of 30,000 orignal cost is subtracted from total. I dont understand how we subtract orignal cost while this has been depreciated for atleast first two years @ 20% so we have already taken part of its value.
much appreciated if you clearify.
John Moffat says
February 8, 2016 at 8:01 am
There is no mention of a revaluation in this question!!!
The machine is sold and the profit or loss on sale is the difference between the sale proceeds and the carrying value (net book value) at the date of sale.
I do suggest that you watch the free lecture on depreciation again.
guo jiun says
December 22, 2015 at 7:12 am
Good day sir, example 5 shows how we revaluate on a straight line basis. But, what if it is reducing, i think the double entries are the same but what about the part where we determine the remaining life? I know there’s probably a formula for this to work backwards.
December 23, 2015 at 6:53 am
With reducing balance we do not estimate the useful life.
We would continue to use the same % applied to the new value.
December 23, 2015 at 8:00 am
As if it is the first year huh? How did it slip my mind? Thank you.
December 23, 2015 at 8:26 am
And you are welcome
November 21, 2015 at 8:50 am
What do you mean by saying non current assets fall in value and we depreciate them. In previous lecture you said we depreciate just because to spread the cost over it useful life as expense?.
November 21, 2015 at 9:22 am
The reason for depreciating is to spread the cost, certainly.
But as you will have seen in the earlier lectures on depreciation, when we do depreciate, one effect is to have the expense in the Statement of profit or loss, and the other effect is to reduce the carrying value (net book value) in the Statement of financial position.
November 20, 2015 at 4:07 pm
Why you choose to take 2% of orignal cost in first half to take depreciation charge on orignal cost of building i.e. 3,600,000and in second half you choose to take remaining years to take depreciation charge on re valued building cost i.e.3,072,000. Why u didn’t take 2% in second half also
November 20, 2015 at 4:09 pm
The 2% meant that there was expected to be a 50 year life (100% / 50 = 2%).
After it is revalued there are no longer 50 years of life left, so the new depreciation is based on the remaining life.
Why u didn’t take 2% to take depreciation charge on revalued cost?
November 20, 2015 at 4:10 pm
I have just answered that!!!
December 22, 2015 at 7:00 am
The building was revalued yes? So new value is 3.072mil. How do we charge on a straight line basis? New value less any residual value (in the exampe, none) over remaining life. What sir is saying is that the remaining life have changed. If we were to charge 2% we would be going against the last line in the example since we would be depreciating over 50 years again. That is why new cost over remaining life times proportion of time up till end of reporting year = 44.522k.
December 23, 2015 at 6:54 am
Reducing balance at 2% is not the same as a useful life of 50 years.
November 20, 2015 at 3:20 pm
I didn’t understand revaluation profit at all. In what sense you are calling it profit although i know its not earned by selling building?
November 20, 2015 at 3:57 pm
Suppose you have a building that appears on the Statement of financial position at $100,000.
Suppose you get a valuation and it is now really worth $250,000.
If you decide to revalue that it will appear on the SOFP at $250,000 which is a ‘profit’ of $100,000.
It is not a ‘real’ profit because you have not actually sold it. That is why the ‘profit’ does not appear in the Statement of profit or loss, but instead is shown separately as ‘revaluation reserve’ (and cannot be paid out to shareholders as a dividend).
November 20, 2015 at 5:11 pm
Sir can you explain that how there is profit in this case, as the value decreases from 3,600,000 to 3,072,000
November 20, 2015 at 5:13 pm
But the value is not 3,600,000 at all – that is the original cost.
The ‘value’ is the cost less the accumulated depreciation.
October 28, 2015 at 8:24 pm
There are no lectures on Chapter 7
October 28, 2015 at 9:12 pm
It is because there are no calculations involved in that chapter, and so it is for you to read yourself!
(And most of it is mentioned in the depreciation lecture anyway)
October 20, 2015 at 11:41 am
Hello Jonh.I am confused why you revalued the asset when actually it has decreased in value from 3.6 m to 3072m,couldn’t be possible that we were supposed to impair it,by Debiting impairment(expense) and credit the asset as you have credited it?
October 29, 2015 at 4:12 am
Hi Sifiso.Hahaha am based at Durban.But chances are i might come to NMMU next year for B.com Accounting.I have to think about that.
October 29, 2015 at 7:37 am
Its value has not decreased.
Its carrying value (net book value) is cost less accumulated depreciation, and that has increased. It is always the net book value that is changed in a revaluation, and we do it by removing the accumulated depreciation and adjusting the cost to the revalued amount.
(I removed the other comments because this page is for comments on lectures – not for private chatting. You can message privately using the message facility on this website )
December 22, 2015 at 7:18 am
Google is my friend, however i think there is some slight distinction between us and uk accounting so in what paper can i read more about this impairment which seems to effect directly the value of an asset unlike revaluation which seems to effect the nbv. Since the exam is marked by uk standards i hope the material is the same.
October 11, 2015 at 6:05 am
I have a question regarding to Question 5, Test.
From the lecture note, NBV 31/12/03; 52000-30000=22000
but why 30000? I think it would be 15000 because revalued depreciation for 3rd year is 15000..
please give me an answer.
October 11, 2015 at 8:59 am
I assume you mean question 4.
The NBV at 31.12.01 is 52,000.
There are 2 more years up to 31.12.03.
So the NBV at 31.12.03 is 52,000 – (2 x 15,000) = 22,000.
(The question does not say ‘no charge in the year of sale’ and therefore the is a depreciation charge in both of the two year).
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