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MikeLittle.
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- September 27, 2017 at 10:40 am #408744
A company revalued its land and buildings at the start of the year to $10million ($4m for the land ) . The property cost $5million ($1m for the land ) ten years prior to the revaluation . The total expected useful life of 50years is unchanged . The company’s policy is to make an annual transfer amounts to retained earnings . Show the effect of the above on the financial statements for the year.
From my understanding
Revaluation surplus = valuation – depreciation on original costs.The valuation will appear as non current asset figure on SOFP while the revaluation surplus will appear on the Equity section of SOFP.
Revalued amount was $6m for building and $4m prior to the revaluation respectively .
What I don’t know is the useful life of the asset to use when calcaluting the depreciation on the original costs and revalued amount . So these depreciation figure will appear on the I/S and the gain on revaluation on the other comprehensive
Please , kindly simplify the calculation for me .
The book got revaluation gain/ surplus as $5,800m and depreciation $5,800 and depreciation as (150) on I/S
While on the SOFP the land and building figures totaled &9,850 as non current assetOn Equity: the revaluation surplus (SOCIE) figure was $5,730.
Thanks in advance as I wait in anticipation .
September 27, 2017 at 12:17 pm #408754Immediately prior to revaluation, the balances on Buildings was $4,000,000, on Accumulated Depreciation was $800,000 and on Land was $1,000,000
The combined figure WAS $4,200,000 and needs to be, following revaluation, $10,000,000
So the necessary journal entry will be:
Dr Accumulated Depreciation 800,000 (bringing it to $zero)
Dr Buildings 2,000,000 (bringing it to $6,000,000)
Dr Land $3,000,000 (bringing it to $4,000,000)
Cr Revaluation Reserve $5,800,000We now have an aggregate amount of $10,000,000 split $6,000,000 for the buildings and $4,000,000 for the land
The buildings have a remaining life of 40 years ending in 2057 (it was originally 50, 10 years ago in 2007 and this has not changed so it’s still scheduled to reach the end of its life in 2057 = 40 years away)
1/40 x $6,000,000 = $150,000 annual depreciation charge and that depreciation charge before revaluation was $4,000,000 / 50 = $80,000 so there is a surplus depreciation expense of $70,000
This year’s entries therefore are:
Dr Depreciation Expense $150,000
Cr Accumulated Depreciation $150,000Dr Revaluation Reserve $70,000
Cr Retained Earnings $70,000In the statement of profit or loss there is a depreciation expense of $150,000
In the statement of comprehensive income there is a credit of $70,000
On the statement of financial position there is an asset for Buildings $6,000,000
On the statement of financial position there is a liability for Accumulated Depreciation for Buildings $150,000
On the statement of financial position there is an asset for Land $4,000,000
On the statement of financial position there is within Equity a balance of $5,730,000 ($5,800,000 revaluation surplus less $70,000 to set off against the surplus depreciation)OK?
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