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July 20, 2018 at 2:24 pm
I am having a little difficulty with the Revaluation Reserve – Example 5 – Purpurs.
The lecture notes, page 65 say
“When a non-current asset has been revalued, the future charge for depreciation should be based on the revalued amount and the remaining economic life of the asset”
“The depreciation charge will be higher than it was before the revaluation….”
The example gave straight line depreciation of 2%.
Before revaluation, I calculated the annual depreciation charge as 2% of original cost of $3,600,00 = £72,000 pa ($36,000 for 6 months in the example).
The revalued amount of the buildings is $3,072,000 and using straight depreciation I calculated the annual charge as 2% of $3,072,000 = $61,440 pa. ($30,720 for the last 6 months)
Here the new depreciation charge after revaluation is lower than it was before the revaluation – unless I have misunderstood something?
John Moffat says
July 20, 2018 at 5:28 pm
I explain this in the lecture 🙂
2% straight line is the same as assuming an expected life of 100/2 = 50 years.
As at the date of revaluation the expected remaining life is now less than 50 years and so it will no longer be 2% of the revalued amount. It will be the remaining amount divided by the remaining life.
July 26, 2018 at 3:26 pm
Thanks for your help.
Please could you look at my calculations to check that I now have this correct?
2% straight line depreciation is the same as 100/2 = 50 years estimated useful economic life.
2% straight line depreciation on $3,600,000 is $72,000 depreciation charge per annum.
Accumulated depreciation to 31st Dec 2002 was $1,080,000.
This equates to $1,080,000/$72,000 = 15 years.
Add on the extra 6 months to 30th June 2003 gives 15.5 years accumulated depreciation.
Estimated useful economic life will now be 50 – 15.5 years = 34.5 years.
Revalued asset = $3,072,000.
The notes say ‘When a non-current asset has been revalued, the future charge for depreciation should be based on the revalued amount and the remaining economic life of the asset.’
With this in mind, am I correct to calculate the new annual charge for depreciation to be:
$3,072,000 / 34.5 years = $89,043 per annum.
(If this is correct the new annual charge expressed as a percentage appears to be $89,043/$3,072,000 = 2.89%).
The notes go on to say “the excess of the new charge over the old charge should be transferred from the revaluation reserve to retained earnings”.
I calculated the excess as: $89,043 – $72,000 = $17,043 per annum.
Does this mean that each year $17,043 is transferred from the revaluation reserve to retained earnings, or is it transferred as a lump sum, eg, the excess multiplied by the remaining useful economic life of the asset ($17,043 x 34.5 years = $587,983)
One last question, the formula I have learned for retained earnings is:
Retianed Earnings = Retained Earnings b/f + profit – dividends
And retained earnings is distributable.
To my understanding, any profit on revaluation is not an actual profit because the asset hasn’t been sold and no cash has been received. And depreciation is an expense to the business and no cash profit is made unless there is a gain on disposal of a fixed asset.
So I’m not clear as to where the real cash comes from to distribute to shareholders while the depreciation excess relates to book values and depreciation charges, where does the physical cash come from to distribute to shareholders?
Hope you can help and thanks in advance.
July 26, 2018 at 4:43 pm
Why on earth have you typed all of this out here? The answer is in the lecture notes, as are all of the answers to examples.
The ‘real’ cash for payment of dividends comes from the company’s cash balances. The law says that the maximum they can pay as dividend is the amount of the revenue reserves (as I explain in the lectures), but that does not mean they will pay it as dividend – it depends how much cash they have available and what other plans they have for investing the cash.
July 27, 2018 at 5:39 pm
Chapter 13 answers in the lecture notes.
Before I asked in this forum, I checked for answers in the downloaded notes.
On page 142 titled Chapter 13 the notes state:
“No answers – please watch the lectures.”
I suppose this is partly why I wrote a lot in this post.
I’ll be careful not to ask detailed questions in this forum again – I’ll go to the Ask the Tutor Forum in future.
Thanks for your help so far.
July 28, 2018 at 9:00 am
But the question in Chapter 6, and the answer is in the notes.
March 26, 2018 at 10:33 pm
Why is the depreciation after the revaluation 0? The year end is 31 Dec 2003 and depreciation = 2% straight line Wouldn’t we calculate depreciation for the 6 months from date of revaluation (30 June – 31 Dec 2003) on the new revalued cost of the building… i.e. 2% of $3,072,000?
March 27, 2018 at 7:30 am
The depreciation after the revaluation is not zero. I do say that (even though I do not calculate it because I am showing the entries for the revaluation itself).
It would be 6/12 x 2% x 3,072,000 (because it would only be for 6 months)
March 23, 2018 at 6:11 pm
Do difference in deprection before and after revaluation reduces revaluation surplus? If so what is the logic behind it?
March 24, 2018 at 9:48 am
Depreciation in the SOPL is calculated on the revalued amount.
If they want to, the company can then transfer the excess over what the depreciation would have been on the original cost from the revaluation reserve to retained earnings.
The reason is that the revaluation reserve is not distributable as dividend, but as the asset is depreciated it is only sensible to make that excess distributable by having the transfer.
October 11, 2017 at 2:02 am
As usual, an excellent lecture, I was struggling a bit when the lecturer said of dividing the cost 3,6 million by the revalued cost 3,072 million instead of substracting, it must be that English is not my mother tongue, thank you for the examples and lectures!!!
October 11, 2017 at 4:33 pm
Thank you for the comment 🙂
September 3, 2017 at 4:29 pm
Sir, I gt some doubt with the example given in the video. On 30 June 2003, the building is revalued to 3072,000. Show the relevant ledgers for the year ended 31 december 2003 Should we have to depreciate btwn July to december after the revaluation has been done? Thanks Sir
September 3, 2017 at 4:52 pm
Yes certainly we should continue to depreciate on the revalued amount. I should have carried on and done this and I will add a bit more when I have the time 🙂
July 26, 2017 at 2:48 pm
Good day: What would I do, if the question is written i a way where there are remaining years.
For example, John bought land on December 31, 2000 for $1,000,000 with depreciation over 20 years. On December 31, 2005, John has revalued the land to $1,200,000. What is the revaluation surplus?
How do I approach a question like that?
July 26, 2017 at 4:52 pm
You must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
You have chosen a very bad example because land is the one non-current asset that we do not depreciate!!!
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