Jun 2012 – Q1

Hi,

It is in relation to the PPE adjustment from the additional information in part (iv).

The old depreciation on the asset was $0.5m per annum based on the original $10m cost over the useful life of 20 years.

Following the revaluation at the start of the year to $11m, the new depreciation is now $0.61m per annum. This is based on charging depreciation on the revalued amount over the remaining life of 18 years ($11m/18 years = $0.61m).

We are allowed to make an adjustment in the accounts for the excess depreciation that we are now charging compared to what we were previously charging. We are now charging $0.61m compared to $0.5m, giving us the difference of $0.11m.

This difference is adjusted via a reserve transfer in the statement of changes in equity by DR Revaluation reserve (other components of equity) and CR Retained earnings. In our answer we need to adjust or group other components of equity and group retained earnings to get this effect.

It’s a tricky adjustment, especially as we need to assume that Robby has elected to make the adjustment as the question doesn’t tell us we need to. In all P2 exams it appears we need to always make this assumption unless told otherwise.

Hope this helps you understand it a bit more and that you had a nice day too.