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Hallo,
I am learning about the revaluation of non-current assets and I read in the BPP book the following:
Example:
When Ira Vann commenced trading as a car hire dealer on 1 January 20X1, he purchased business premises at a cost of $50,000.
For the purpose of accounting for depreciation, he decided the following.
(a) The land part of the business premises was worth $20,000; this would not be depreciated.
(b) The building part of the business premises was worth the remaining $30,000. This would be depreciated by the straight-line method to a nil residual value over 30 years.
After five years of trading on 1 January 20X6, Ira decides that his business premises are now worth $150,000, divided into:
Land 75,000
Building 75,000
= 150,000
He estimates that the building still has a further 25 years of useful life remaining.
Calculate the annual charge for depreciation in each of the 30 years of its life, and the statement of financial position value of the land and building as at the end of each year.Then, in the answer, they say the following:
The accounting treatment for the revaluation above will be:
Dr Building – cost ($75,000 – $30,000) $45,000
Dr Building – accumulated depreciation $5,000 (this is for 5yrs)
Dr Land – cost ($75,000 – $20,000) $55,000
CREDIT Revaluation reserve $105,000I can’t explain why the accumulated depreciation is added and not subtracted?
Thank you!
Hallo,
I see the calculation above, but I don’t understand it, how is it that:
the revalued amount less carrying value is the same as the surplus plus depreciation.
Is there an explanation, or it’s just math?
Thank you!
The surplus is the revalued amount less the carrying value.
The revalued value of the building is 75,000.
The carrying value was the cost of 30,000 less 5 years depreciation of 1000 a year, which is 25,000. So the surplus on revaluation of the building is 75,000 – 25,000 = 50,000
For the land it is revaluation of 75,000 less carrying value of 20,000 = 55,000.
Total surplus = 105,000
Nowhere has depreciation been added to anything.
Hallo,
I call it the depreciation is added, because of this entry:
Dr Building – cost ($75,000 – $30,000) $45,000
+ Dr Building – accumulated depreciation $5,000
= 50000
+ Dr Land – cost ($75,000 – $20,000) $55,000
CREDIT Revaluation reserve $105,000This is what confuses me, as there are obviously two ways of calculating, and I don’t understand why the accumulated depreciation is added, i.e.
75000 – 25000 = 45000 + 5000
I am trying to explain the meaning of 45000 + 5000, I know it is the surplus, but 75000 – 25000 is much clearer to me, than 45000 + 5000.
Thank you!
We debit the cost of the asset to increase it to the revalued amount.
We debit accumulated depreciation because it is no longer needed.
It is not that we are adding them together, and there is only one way of actually calculating the revaluation surplus.
(And you should not spend too much time worrying about the t-accounts anyway – it is not a t-account exam and there are very few questions on the double entry. In real life computers do the double entries – it is the accountants job to be able to calculate the figures to be used.)
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