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At 31 December 2010, P Ltd owned a building that had been purchased 20 years previously for $20,000. It was being depreciated at 2% per year. On 31 December 2010, it was revalued at $210,000, and had a remaining useful life of 30 years.
a) What is the depreciation charge for the year ended 31 December 2011?
b) At what amount does the revaluation reserve stand at as at 31 December 2011?I don’t understand the answer you provided
Depreciation charge for 2011 210,000/30 = 7,000 ( why it is not 210,000 x 2% = 4200)
Revaluation reserve for 2011 198,000-6,600= 191,400 ( why the revaluation reserve value have to be deducted by 6,600?thank you in advance for answering my question.
I appreciate.
If it was being depreciated at 2% per year, the expected life must have been 100/2 = 50 years.
It has been owned for 20 years and so the life remaining is 50 – 20 = 30 years.The revaluation reserve is reduced by the difference between the depreciation on the new value (7,000) and the depreciation on the original cost (400).
Thanks for answer but i still dont understand few things about revaluation reserved.
i know there that the revaluation reserve was reduced by the 6,600.
But i don’t understand why the revaluation reserved has to be reduced in 2011. i thought the revaluation reserved will remain the same until there is another revaluation process takes place again.
so, do you meant every year the revaluation reserved will be deducted by 6,600?
i appreciate for your patience and time in explaining the question.
Yes – every year 6,600 will be transferred from the revaluation reserved to retained earnings.
Sir, once there was a question which involved revaluation and You said that that Revalued amount is used to calculate new depreciation for the remaining useful life, the current period included.
So, I expected the useful life to be
30 + 1 = 31years.Actually I have been pondering to date. Did I just misunderstand?
The question you are referring to was not the same. It was where only the useful life was changed.
Here, there was a revaluation at the end of the year, and so the current year would be depreciated based on the original cost and only after the revaluation (so in the following year) would depreciation be based on the revalued amount.
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