Mini exercises (non current assets) question10

Sorry to hear about your recent F7 experience 🙁

As at 1 October 2010, the start of the current year and the date of the revaluation, the asset has been depreciated by $10,000 out of the original $50,000 cost.

That’s 1/5 of its 20 year life already gone so there’s only 16 years estimated useful life left … ‘an original life of 20 years which has not changed’

So the revalued amount of $48,000 is to be depreciated over 16 remaining years and that computes to $3,000 per annum

‘dr PPE 8000 CR revaluation reserve. 8000 , would that be incorrect?’ – yes, it would be incorrect. The revaluation is saying, in effect, that we have charged too much depreciation in the past years since acquisition so that $8,000 is an adjustment to the depreciation. It is not an adjustment to historic cost. We would only change the cost figure where the revaluation gain exceeds the accumulated depreciation

‘The company does not make a transfer to retained earnings in respect of excess depreciation on the revaluation of its assets.’ – following a revaluation, a company will depreciate its assets on their revalued amounts

That has the effect of artificially reducing the annual profits by the extent of that additional depreciation of the revalued surplus.

Now, ask yourself this … is it ‘fair’ that retained earnings should be artificially reduced simply because the TNCA have been revalued? We didn’t need to revalue but, by doing so, we have depressed those retained earnings

It is not a mandatory requirement, but it is a recommendation, that a company should transfer from Revaluation Reserve each year an amount that represents the additional depreciation that has been charged on that revaluation surplus

The transfer is within the Statement of Changes in Equity from Revaluation Reserve to Retained earnings

OK?