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Hi,
Please explain the following questions for me.
QUESTION 1 : Banter Co purchased an office building on 1 january 20X1. The building cost was $ 1,600,000 and this was depreciated by the straight line method at 2% per year, assuming a 50-year life and nil residual value. The building was re-valued to $ 2,250,000 on 1 Jan 20X6. The useful life was not revised. The company’s financial year ends on 31 December.
What is the balance on the valuation surplus at 31 December 20X6?
A.$650,000
B.$792,000
C. 797,000
D.$ 810,000 . This is a question 8.19 in BPP revision kit.
My answer is:
The accumulated depreciation on the building at 31/12/X5 = 1,600,000*0,02*5= 160,000$
So : Dr Building (2,250,000-1,600,000) : 650,000
Dr Accumulated Depreciation : 160,000
Cr Revaluation surplus : 810,000$
? D is my answer. But their answer is B. They transferred the excess depreciation from revaluation surplus to retained earning . I don’t know why? The question didn’t mention that. I wonder if we must always transfer the excess depreciation from revaluation surplus to retained earning for the year ended? Pls explain it for me.QUESTION 2: A company purchased an asset on 1 Jan 20X3 at a cost of 1,000,000. It is depreciated over 50 years by the straight line method (nil residual value) ,with a proportionate charge for depreciation in the year of acquisition and the year of disposal. At 31 December 20X4 the asset was re-valued to 1,200,000$ . There was no change in the expected useful life of the asset.
The asset was sold on 30 June 20×5 for 1,195,000.
What profit or loss on disposal of the asset will be reported in the statement of profit or loss of the company for the year ended 31/12/X5? ( This is a question 8.20 from BPP revision kit)
A. Profit of $ 7,500
B. Profit of 235,000
C. Profit of 247,500
D. Loss of 5,000
My answer is :
The accumulated depreciation at 31/12/X4= 1,000,000/50 *2 = 40,000$
The charging of depreciation on 30 June 20×5 : 1,200,000/48 *6/12 = 12,500$
The carrying value of the asset is : 1,000,000-40,000-12,500= 947,500$
? Profit of disposal : 1,195,000-947,500= $ 247,500
So C is my answer, but their answer is A. They calculated the carrying amount by the valuation value less accumulated to 30/6/x5 .I don’t know why they used the valuation value ???,I think this is just an unrealized value.
Please explain 2 question for me.
Thank you very much.
Thao Huyen,Question 1:
The business can choose whether to transfer the excess depreciation or not – they do not have to. (The total reserves will not change, but it will mean that more is distributable as dividend). The question should have said whether or not they made the transfer.
Question 2:
The profit or loss in the Statement of profit or loss is always the difference between the proceeds and the carrying value (the revalued amount less accumulated depreciation). When the asset is sold then the revaluation surplus is transferred to retained earnings, but this is shown in the Statement of changes in equity – not in the Statement of profit or loss.
Question 2: I’m still confused about that. You mean their answer is true? and we can use revalued amount to calculate the carrying value to determine profit.?? pls explain it for me in detail.
Thanks you,Yes – the answer is correct.
I am not sure what more explanation to give. The profit or loss on sale that is shown in the Statement of profit or loss is always the difference between the sale proceeds and the carrying value (net book value) whether or not the asset has previously been revalued.
You mean we can calculate the carrying value by the revaluation amount less accumulated depreciation ?? NOT by original cost less accumulated depreciation??
Sir I have a doubt on the first question here. In BPP, they’ve calculated depreciation by 2% prior to revaluation. But after revaluation, they switched to calculating depreciation using remaining useful life. Why is that? Why did they not take useful life before revaluation, or conversely, why did they not take % post revaluation?
Thanks in advanceAfter revaluation, we calculate depreciation in the normal way but on the revalued amount.
Given that the useful life was original estimated as being 50 years from the date of the original purchase we assume (unless obviously told different) that the total useful life is not changed. So given that they had owned the asset for several years at the time of the revaluation, the remaining useful life is now 50 years less the years that they have already owned it.
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