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Hi
Revaluation of an asset
say as if an asset cost £4000 at 01.10.99 ans revalued on 1.10.04to £6000
how to calculate the depreciation prior to depreciation and the amount to the revaluation reserve
please help me on thisthanks
best wishes- Topics: 3
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where is the life of the asset is it to be assumed lolz? u r asking how to calculate depriciation prior to depriciation what does that mean ???
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why did u forget an important point..! do u ever forget to drink water a day ?? now i m not telling
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befor revaluation 400/yr
after 5 years nbv wud b 2000
now in increase in value is 4000
entry wud b
Dr acc depriciation 2000
Dr Asset 2000
Cr Rev reserve 4000After the revaluation then the amount of depreciation charged would increase to 1200 and this would be debited to the income statement as depreciation expense and credited to accumulated depreciation accounts. This is because 6000/5 years = 1200 per year.The revaluation reserve would be debited by 800 per year and the retained earnings account would be credited by 800 by means of a transfer between the reserves(revaluation reserve and the retained earnings reserve) to deal with the fact that retained earnings would otherwise be lower than they would have been had the revaluation not taken place- clearly a nonsensical situation.In this way the revaluation reserve is also lowered to zero over the remaining life of the asset.
I like the explanation by mrionbain good job and the working by Furgan but am jst doubting the double entry to me the double is as below
DR Assets 4000
Cr Rev Reserve 4000
Before revaluation there was a double entry already
Dr Acc dep’n 2000
Cr Assets 2000
this gives the effect of the NBV of 2000 passing another Dr of 2000 to be is a duplication lets argue itYou’re wrong Jack – sorry. Jonbain is correct. Jack, before the revaluation, the double entry would have been Dr Income Statement ( through the Depreciation Expense Account ), Credit Accumulated Depreciation, not Dr Accumulated Depreciation, Cr Asset.
There’s no argument – you’re wrong!
I see the sense we are adding the 2000 to the 4000 to bring the cost to 6000 the Dr of 2000 to the acc dep’n is to write off the balance so that in yr 6 the balance is 1200 is that the logic.
A revaluation is primarily an adjustment to depreciation – we have depreciated too much ( on reflection ) so the initial adjustment is to debit the Accumulated Depreciation Account and credit Revaluation Account. Once Accumulated Depreciation Account has been eliminated, any further revaluation is debited to the asset and credited to the Revaluation Account.
Now we have an asset carried at revalued amount of $6,000 with a remaining estimated useful life of 5 years,
6,000 / 5 = 1,200 per annum depreciation from year end 30 September ’05 for the next five years
Thanks werty for helping to clear up the points that Furgan and I were making. In addition in order to clarify the argument to jackchitan and others the 1200 depreciation is “made up” of 400 depreciation thatwould have been charged regardless of whether any revaluation had taken place or not and 800 that resulted from the revaluation- 1200-400=800.this is where I got the value for the reserve transfer between the revaluation reserve and retained earnings.
Quite right – it’s considered to be best practice – so that retained earnings are not hammered by an additional depreciation expense as a result of the revaluation. So, transfer the “excess depreciation” the 800 ( ie $4,000 / 5 remaining years ) from revaluation to Retained Earnings
thanks a lot for helping me to understand this area in IAS 16-PPE
let say if at yr end of 30.09.04,the double entry will be
Dr asset 4000
Cr Revaluation reserve 3200
Cr retained earning 800so that in extract of income statement for the year ending 30.09.04
provision for dep 4000/5 800
statement of fin position for the yr ending 30.09.04
asset 6000
prov for dep 800
nbv 5200equity side
rev reserve 3200
retained earning 800- Topics: 3
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Poonum u r again confusing and making noodles of this question!! 🙂
@ year end 30.9.04 what do u mean by this double entry??
Dr asset 4000
Cr Revaluation reserve 3200
Cr retained earning 800??U guys are great I didnt see things at ur angle I look for more but I don’t know whats happening with the F7 calender may be Warty knows
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also u r not taking care of cutt off..! revaluation took place after the year end.. See the complete solution again and try 2 make ur mind rotate like hard disk 🙂
if we were to prepare the financial statement for the year Poonum what period are u looking at? may be that is what is missing – nothing is going to the Rev reserve before 30.09.04 at that stage the double entry is as below
DR Depreciation 400 (income statement)
Cr Acc depreciation 400 (Balance sheet)
revaluation took effect after 01.10.04- Topics: 3
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exactly jackchitan..!!
Still wrong, Poonum! As at 30 September the asset has not been revalued – your question stated that it was revalued on 1 October, 2004, not 30 september, 2004.
So as at 30 September the asset would be shown at cost4,000 less accumulated depreciation of 2,000 giving a net book value of 2,000
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furgan,
thanks for the clarification…but still there is one confusion in my mind …how u have split that difference 4000(6000 revalutaion -2000 nbv), as Dr. accumulated depreciation 2000, Dr. assets 2000. and what would be the extracts in IS and SFP after the revaluation…that was exactly what I want to know
We have to calculate new depreciation after revaluation 6000/5=1200 which goes to IS .Is This ok- Topics: 2
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If I may jump in mrjorbainis right but want ot clarify the transfer of the excess deprn to retain earning. This is that part of the revaluation is being realised 800 per yr. See at the end of the remaining useful life of the asset the full revaln would have realise through a yearly transfer of 800x 5yrs =4000.This is not taken to the I/S but is reflected in the changes in equity.
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I thinks it like that:
Year ended 30/9/04:
Dr. Expense Dep. (4000/10ys) 400
Cr. Acc. Dep. 400
Then, SFP at 30/9/04:
Asset 4000
Acc. Dep. 2000
=> Carry value of Asset (4000-2000)= 2000
Remaining year of asset 5 ysOn 1/10/04, revalue asset = 6000 and assume that remaining year of asset not change.
Difference between carry value and revalue
Dr. PPE (asset) (6000-2000) 4000
Cr. OCI – Revalue Reserve 4000
Depreciation
Dr. Dep. Expense (6000/5) 1200
Cr. Acc. Dep. 1200
Difference between depreciation at cost (400/year) and at revalue (1200/year)
Dr. OCI – Revalue Reserve (1200-400) 800
Cr. Retain Earning 800
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