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Hallo,
I am struggling answering this problem, I get to somewhere but then no further:
Homer, a company, purchased an office building on 1st January 2004 for $800,000. The
property was depreciated at 2% on a straight line basis. On 1st January 2009 it was
decided to revalue the building to $1,125,000. The useful life was not revised.
What is the balance on the revaluation reserve at 31st December 2009?In the solution they use useful life after the revaluation of 45 years, which is not mentioned above, I wonder how they get it, or they have skipped in the example.
The answer is $396,000.
Do you have any meaningful solution?
Thank you!
Since the deprecation was 2% straight line, it meant that its useful life was 50 years (100%/2%)
After owing it for 5 years, the remaining useful life is therefore 45 years.Hallo,
This was a great help!
There is one further part of the example that I don’t understand. It is about the depreciation. I read that you said we had to get rid of the old depreciation but here I think they do something further.
They calculate the new depreciation for 2009 which is 1125000 / 45yrs = 25000 which is ok, but then they subtract from it the old depreciation for one year, i.e. 25000 – 2%*800000 = 9000 , I thought the old depreciation was over with, (they have calculated and used it before that) but they do this:
Reserves transfer
Dr Revaluation reserve $25,000 – (2% × $800,000) $9,000
Cr Retained earnings $9,000I don’t understand why 9000 (which is depreciation again, unless not, resulting from a strange subtraction) is treated again as capital income and used in reserves and earnings.
Thank you!
The 9000 is the difference between the new deprecation and the old depreciation.
The revaluation reserve is keeping the profit separate because it is not a ‘real’ profit and can not be paid as dividend.
As we depreciated the asset, we are charging an extra 9,000 because it was revalued. So each year we can sort of ‘cancel’ it, but adding it to the retained earnings (so it ‘cancels out’ the extra 9,000 being charged in the income statement, and debiting the revaluation reserve because now we have reduced the asset value, that bit of the revaluation is no longer a profit that is not payable as dividend.
Hallo,
Partly I understand, partly not.
Ok, the asset is revalued, costs more, and the depreciation is 25000 vs 16000. Why don’t we depreciate with 25000 all the time, but we have to use the 9000?
I don’t understand what we are cancelling.
I know depreciation cancels the cost of the asset, is this the same cancelling? If yes, why don’t we cancel with 25000, but with 9000?
Thank you!
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