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Hello
i have come across a question where a business uses the revluation model – it says at 31.05.x0 that the carrying amount of a non current asset is 16m. Then at 01,06,x0 it says the net selling price is 18.5m , the value in use 20m and the fair value is 18m. My question is what value should be taken into consideration among these three>?Also in part b theres a question about a change in residual value
It says an asset has been purchased for $20m on 01.06.98 and the carrying amount at 31.05.00 is 16m. At the time of purchase the estimated residual value was 4m. However it also says that a similar asset which have the same aging conditions had a residual value of 8m at 31.05.00 but at 01.06.99 the residual value was 11m. The company uses a straight line depreciation policy and the asset has a useful lives of 8 years.The company is now considering changing the residual value.
Does anyone know what is the accounting procedures for a change in residual value and what amount must be taken 11m or 8m>?a) 18m
b) this is a revision to an accounting estimate and should be applied prospectively and not retrospectively. But it’s also a change in accounting policy and that WOULD require an adjustment to prior years (changing from cost model to revaluation model)
The asset, when bought on 1 June, 1998 would be subjected to depreciation over 8 years at 2m per annum with an estimated residual value of 4m. So:- Cost 20, depreciation year to 31 May, 1999 2m giving a net book value at 31 May, 1999 of 18m.
This in turn would have depreciation of 2m in the year to 31 May, 2000 giving a net book value of 16m as at 31 May, 2000.
If the company is to apply the revaluation model, this requires a calculation of what the asset would have been stated at if this new model had always been applied.
This gives us:- Cost of 20m, depreciation to 31 May, 1999 of 2m (residual value estimate of 4m) and a net book value of 18m in the 1999 financial statements. But the revaluation model requires us to go back and restate the asset as though the policy had always been applied. Having depreciated by 2m, we now (at 1 June, 1999) reassess the residual value as being 11m. This leaves us with a net book value brought forward as at 1 June, 1999 of 18m and a residual value estimated as 11m so 7m to depreciate over the remaining 7 years ie a depreciation charge for the year 2000 of 1m. OK so far?
A year goes by and we’re now at 31 May, 2000. We have, under the cost model, depreciated by 2m straight line with an original estimated residual value of 4m. Depreciation under this model for year 2000 is 2m giving us 16m carrying value as per the question. Under the revaluation model, depreciation (as above) will be 1m giving a net book value of 18m – 1m = 17m.
So here we are at 31 May, 2000! Cost model gives 16m, revaluation model gives 17m.
Next year, to 31 May, 2001, depreciation under cost model will be 2m whereas under revaluation model it will be (17m – 8m (estimated residual value) ) = 9m. That 9m will be depreciated over the remaining life of 6 years ie at 1.5m per annum. So, at 31 May, 2001, we have a cost model net book value of 14m and a revaluation model net book value of 15.5m (17m – 1.5m)
If we are asked to show the effect as at 31 May, 2000, the 2000 financial statements will reflect an asset with a net book value of 17m instead of the cost model 16m
If the question is asking for the effect as at 31 May, 2001, the pre-stated prior year figures will be adjusted to reflect this change from 16m to 17m with corresponding adjustments to Statement of Changes in Equity, Statement of Financial Position and Statement of Income and the 2001 financial statements will show 15.5m in SoFP and 1.5m in SoI depreciation
Is that ok? If not, post again on P2 Ask the tutor
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