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Depreciation Example 5
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Dear Mr. John,
In depreciation and disposal,
If I sold some of non-current assets for $X,
should I subtract the figure
from the carrying amount of non-current assets?
Could I ask the reason why
Because in my opinion, if I sold them, I exchange, therefore it means offset…
(or maybe offset in cash or receivables account? @ _ @)
Sir ,your lectures are very helpful!!! Thankyou so much
Thank you for your comment 馃檪
Hello sir
I’m really confused with the accumulated depreciation as the value of asset before revaluation is equal to original cost less acc.depreciation so her befor revaluation we have the original cost 3600000 and accumulated depreciation 1116000 so for the current value of asset before revaluation we shod mines the accumulated depreciation 1116000 from the original cost 3600000 I know I’m going wrong but please help
But if you look at the final balance on the revaluation account, it is the difference between the new value and the value in the accounting statements (cost less accumulated depreciation).
How ? It is the only lecture that I’m confused.
Thank you I got my answer
I am pleased you got the answer 馃檪
In notes of chapter The provisions of IAS16 it is written that any upward revaluation should be credited to revaluation reserve and any downward value should be charged as an expense in the statement of profit or loss.
But in the above lecture you credited the downward value in example 5 i.e. 3,072,000 to revaluation reserve. I think it should be charged as an expense to statement of p&l account. Please explain.
What downward value?!!
The building is being revalued upwards from a current value of 2,520,000 up to 3,072,000.
In order to achieve this the ‘cost’ and the accumulated depreciation both need entries and the double entry for both is to the revaluation account.
No sir, it was 3,600,000 then we revalued it to 3,072,000. Isn’t the value decreasing (going downwards)?
Im so confused.
3,600,000 was the original cost.
The value in the Statement of financial position before the revaluation is the original cost less the accumulated depreciation, which comes to 2,520,000!
oh! Alright. Thank you so much sir.
You are welcome 馃檪
sir John, the way i always understood revaluation and how i applied it to this question was:
the original cost was 3.6m.
the cost before revaluation was 3.6m – 1.08m (acc depn) – 36,000 (6 months depn before rev) = 2.484m.
thus, in the t-account for “building”, i’ll start my opening balance with 2.484m on debit side, recognise revaluation gain of 0.588m on debit side, and the depreciation of 44,522 (6 months after depreciation).
was i wrong, or it’s just another allowed method?
It doesn’t matter how you do the entries provided that the end result is correct.
(In the exam it doesn’t matter because you will not be asked for the entries – only for the end result)
Thanks for the lectures!!?
Thank you for the comment 馃檪
Thanks Mr Moffat.. your lectures are very helpful
Thank you for the comment 馃檪
Hi. I just wanted to know, why do we debit depreciation expense, but credit accumulated depreciation? Since both of them are depreciatons, why do we treat them differently? TIA.
The debit is to record the expense for the Statement of profit or loss. The credit is to reduce the value of the asset for the Statement of financial position.
Hi John,
Many thanks for all the lectures!
I have a question on the notes for this lecture: “The depreciation charge will be higher than it was before the revaluation, and then excess of
the new charge over the old charge should be transferred from the revaluation reserve to
accumulated profits.”
Could you expand on this point with an example?
Thanks in advance!
Not here (and it is not something you are likely to need to do in the F3 exam).
If you want an example then ask in the Ask the Tutor Forum.
Thanks!
Thank Sir for your lectures, perfect and excellent . But my questions are:
Will it be wrong if we initially credit the Asset account ( Building) with the revaluation account 3,072,000 and debit the revaluation account with same value?
Secondly, you talked about the 50 years of the useful life the Building (Asset) by 100/2 … how did you arrive at 100/2 that gave us the 50 yrs.? Sorry i am not very mathematical.
It would be wrong because crediting the asset account would reduce its value.
For your second question it is because the total is 100% and 2% each year will take 50 years to reduce the cost to zero.
(In the same way, 10% a year would take 10 years to reduce the cost to zero.)
Dear sir,
thank you for comprehensive lecture on depreciation. it helped me alot understanding how to depreciate after revaluation of asset.
However, i need your help while solving question 2 of test questions. I would reproduce the question over here.
on 31 Oct 2013 machine cost is 120,000, accumulated dep. is 25000.
business sells machine for 10,000 on 1 jan 2014. this machine had orignal cost of 30,000 on 1 apr 2012.
company policy is str. line depreciation @ 20%, on monthly basis.
sir, according to my understanding from lecture, when asset was revalued it should have been divided upon remaining years of life to get depreciation expense for year. here we dont have that information so we dont know remaining life period. Secondly, if asset is sold on 1jan 2014, we dont have asset after this month so we cannot depreciate it for remaining months of financial years. but in answer it has been depreciate for remaining months of financial year as well and then the amount of 30,000 orignal cost is subtracted from total. I dont understand how we subtract orignal cost while this has been depreciated for atleast first two years @ 20% so we have already taken part of its value.
much appreciated if you clearify.
There is no mention of a revaluation in this question!!!
The machine is sold and the profit or loss on sale is the difference between the sale proceeds and the carrying value (net book value) at the date of sale.
I do suggest that you watch the free lecture on depreciation again.
Good day sir, example 5 shows how we revaluate on a straight line basis. But, what if it is reducing, i think the double entries are the same but what about the part where we determine the remaining life? I know there’s probably a formula for this to work backwards.
With reducing balance we do not estimate the useful life.
We would continue to use the same % applied to the new value.
As if it is the first year huh? How did it slip my mind? Thank you.
Yes 馃檪
And you are welcome 馃檪
What do you mean by saying non current assets fall in value and we depreciate them. In previous lecture you said we depreciate just because to spread the cost over it useful life as expense?.
The reason for depreciating is to spread the cost, certainly.
But as you will have seen in the earlier lectures on depreciation, when we do depreciate, one effect is to have the expense in the Statement of profit or loss, and the other effect is to reduce the carrying value (net book value) in the Statement of financial position.
Why you choose to take 2% of orignal cost in first half to take depreciation charge on orignal cost of building i.e. 3,600,000and in second half you choose to take remaining years to take depreciation charge on re valued building cost i.e.3,072,000. Why u didn’t take 2% in second half also
The 2% meant that there was expected to be a 50 year life (100% / 50 = 2%).
After it is revalued there are no longer 50 years of life left, so the new depreciation is based on the remaining life.
Why u didn’t take 2% to take depreciation charge on revalued cost?
I have just answered that!!!
The building was revalued yes? So new value is 3.072mil. How do we charge on a straight line basis? New value less any residual value (in the exampe, none) over remaining life. What sir is saying is that the remaining life have changed. If we were to charge 2% we would be going against the last line in the example since we would be depreciating over 50 years again. That is why new cost over remaining life times proportion of time up till end of reporting year = 44.522k.
Reducing balance at 2% is not the same as a useful life of 50 years.
I didn’t understand revaluation profit at all. In what sense you are calling it profit although i know its not earned by selling building?
Suppose you have a building that appears on the Statement of financial position at $100,000.
Suppose you get a valuation and it is now really worth $250,000.
If you decide to revalue that it will appear on the SOFP at $250,000 which is a ‘profit’ of $100,000.
It is not a ‘real’ profit because you have not actually sold it. That is why the ‘profit’ does not appear in the Statement of profit or loss, but instead is shown separately as ‘revaluation reserve’ (and cannot be paid out to shareholders as a dividend).
Sir can you explain that how there is profit in this case, as the value decreases from 3,600,000 to 3,072,000
But the value is not 3,600,000 at all – that is the original cost.
The ‘value’ is the cost less the accumulated depreciation.
Respected Sir,
There are no lectures on Chapter 7
I know 馃檪
It is because there are no calculations involved in that chapter, and so it is for you to read yourself!
(And most of it is mentioned in the depreciation lecture anyway)
Hello Jonh.I am confused why you revalued the asset when actually it has decreased in value from 3.6 m to 3072m,couldn’t be possible that we were supposed to impair it,by Debiting impairment(expense) and credit the asset as you have credited it?
Hi Sifiso.Hahaha am based at Durban.But chances are i might come to NMMU next year for B.com Accounting.I have to think about that.
Its value has not decreased.
Its carrying value (net book value) is cost less accumulated depreciation, and that has increased. It is always the net book value that is changed in a revaluation, and we do it by removing the accumulated depreciation and adjusting the cost to the revalued amount.
(I removed the other comments because this page is for comments on lectures – not for private chatting. You can message privately using the message facility on this website 馃檪 )
Google is my friend, however i think there is some slight distinction between us and uk accounting so in what paper can i read more about this impairment which seems to effect directly the value of an asset unlike revaluation which seems to effect the nbv. Since the exam is marked by uk standards i hope the material is the same.
Dear sir,
I have a question regarding to Question 5, Test.
From the lecture note, NBV 31/12/03; 52000-30000=22000
but why 30000? I think it would be 15000 because revalued depreciation for 3rd year is 15000..
please give me an answer.
thanks.
I assume you mean question 4.
The NBV at 31.12.01 is 52,000.
There are 2 more years up to 31.12.03.
So the NBV at 31.12.03 is 52,000 – (2 x 15,000) = 22,000.
(The question does not say ‘no charge in the year of sale’ and therefore the is a depreciation charge in both of the two year).