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Morning sir, I was reading excess depreciation section on bpp and may I botger you with the double entry of excess depreciation?
The text book said that the IAS allows to transfer the excess depreciation from revaluation surplus to retained earnings and the example is that the new depreciation is greater than old one and then the double entry for it is cr retained earnings and dr revaluation surplus. I am bit confused why increasing in depreciation would lead to increase in retained earnings?
Many thanks for your help!
You are confusing two separate things.
The higher depreciation will have appeared in the SOPL and will have reduced the profit and therefore reduced retained earnings.
As far as the transfer is concerned, it does not affect the total owed to shareholders at all (retained earnings increases and revaluation reserve falls by the same amount). All it does is make part of the revaluation reserve distributable as dividend.
Many thanks sir, but I didn’t quite understand the last sentence you mentioned. Since would the amount of excess depreciation from revaluation reserve could be treated as dividend? Is it just how the rule settled?
If you watch my free lectures again then you will see that the revaluation reserve is a capital reserve (and therefore cannot be paid out as dividend). However retained earnings is a revenue reserve which means that it can be paid out as dividend. (The company does not have to pay it all out as dividend (which is why they do not have to make the transfer – it is just that they are allowed to make it if they want to)).
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