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January 23, 2017 at 8:51 pm #369103busybeestudying
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I didn’t make it to F7 . so will be retaking it again in march.
I returned to study after a long time and thought I could do it in 3 months. AccA is hard studying.
Started with mini exercises. non current assets quesstion10
(1)After the property being revalued to 48million the current year deprication with 20 years life comes to 2400000 but answer says 3000 . Please explain this bit.
(2)The revaluation gain journal entry.
Dr Acc Dep ppe 8000
Cr Revaluation Reserve 8000
If I write it as dr PPE 8000 CR revaluation reserve. 8000 , would that be incorrect?
I do not understand the reason for Dr Acc Dep ppe 8000.
The question also says the following in the end.
. The company does not make a transfer to retained earnings in respect of excess depreciation on the revaluation of its assets.
I don’t understand this part of question too.
Sorry about the lengthy post.
Really appreciate all your effort and advice.
Many ThanksJanuary 24, 2017 at 8:43 am #369196MikeLittleKeymaster
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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
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