- This topic has 13 replies, 4 voices, and was last updated 7 years ago by
.
- Posts
Hi John,
Is this question not wrong for not telling me the company’s policy is to transfer the excess depreciation to retained earning? As it is a thing that companies can do but not necessarily do? Or am I supposed to always do if I see a question like this on the exam?
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 January 20X6. The useful life was not revised. The company’s financial year ends on 31 December. What is the balance on the revaluation reserve at 31 December 20X6?
ANS: Revaluation Reserve $810,000 – $18,000 (excess depreciation charge transferred to retained earnings) = $792,000
You are correct in saying that the company is allowed to make the transfer, but does not have to make the transfer.
If it should come in the exam, then I think they will make it clear whether or not to make the transfer. However if the question does not say, then assume that they do.
Thank you for your answer John.
Just one more question on this..
The excess of Depreciation we:
DR Revaluation and
CR Retained EarningsAnd then keep depreciating with the old amount, right?
The entry is correct.
However you depreciate with the new amount, but make that transfer each year.
Hallo,
When you say “However you depreciate with the new amount, but make that transfer each year.” – what is the point of transferring each year, till the end of the useful life, we have now another cost of the asset, and this is what counts, why do we have to compare the two depreciations for all the years left?
Thank you!
Because the revaluation reserve is non-distributable.
As we depreciate the excess, then it reduces the non-distributable amount and increases the distributable amount.I think, it’s getting a bit virtual to me.
First, our asset cost has increased, so has our depreciation, and, as we have a higher depreciation the excess is transferred eventually to the retained earnings.
Why do I need to bother with this excess depreciation, this belongs to the past, we have a new cost now, and a new depreciation, why do I care about the difference between the two depreciations?
And, what gives me the right to make this excess depreciation a profit, isn’t that illegal?
Thank you!
The excess depreciation is not shown in the SOPOL – it is transferred from revaluation reserve to retained earnings.
Both revaluation reserve and retained earnings are amounts owed to shareholders. However revaluation reserves are not distributable. All that the transfer does is make it distributable. It is not making it any extra profit at all, and it is certainly not illegal.
Hallo,
1. But the new depreciation (on the revalued amount) appears in the SOPOL,and it includes the excess in itself, is it correct, by saying not shown, you mean it’s not shown as a separate, single amount, otherwise it’s there?
2. When we revalue, we have not received real cash, so, if we haven’t received real cash, how can we make it distributable?
Thank you!
1. OK, it is there included in the total depreciation charge in the SOPOL.
2. Because the figure in the SOPOL includes the extra depreciation due to having revalued, the profit is lower than it otherwise would have been and therefore so is are the retained earnings. Making the transfer from revaluation reserves to retained earnings brings the retained earnings back to what they would have been if we had not revalued (because if we had not revalued we would have continued to depreciate based on the original cost) and this would have been distributable.
From the explanation above, it seems as though we are not allowed to depreciate the revalued portion from the Retained Earnings.
What is the logic behind transferring from revaluation Reserve to Retained Earning?
Why do we want to make it distribuatable?There does not have to be the transfer – it is up to the company.
However since shareholders will want to receive dividends, it is normal for the company to want as much to be allowed to be distributed as possible (even though they will probably not pay it as dividend, it gives them the flexibility).
- The topic ‘Excess depreciation charge transferred to retained earnings’ is closed to new replies.