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Hi,
The question is as follow:
End of asset’s 7th year, original cost: $800,000, depreciation for 7 years @10% straight line $560,000.
Asset to be revalued by $600,000, remaining life revised to 5 years.
The correct answer is $40,000 debited to asset account, $168,000 depreciation. Can anybody help explain why it is $40,000 debited to asset account?
Thanks a lot!
Hi,
I used to stuck on these as well, but I have figured out a way and hopes it is useful to you. Mike, if you are reading this, please comment if I am correct on this.
The $40,000 is the excess depreciation charge.
Depreciation charge before valuation = $80,000
Depreciation charge after valuation = $120,000Therefore, an increase of $40,000
The question will carry a sentence that sounds like “X co makes an annual transfer to retained profits to reflect the realisation of the revaluation reserve”. Highlight that sentence knowing that the excess depreciation is to be deducted from revaluation reserve and added to retained earnings (SOCIE).
Hi Emma,
Thanks a lot for your reply. Much appreciated!
The question is: what will be depreciated to the asset account and what will the next year depreciation charge be?
From my under standing: revalued by $600,000 means the assets will now have a carrying of: (800,000 – 560,000) + 600,000 which is now $840,000.
Depreciation by straight line for 5 years results a depreciation charge of $168,000 each year.
A debit of $40,000 to the asset account results in $840,000, the new carrying figure above? I still don’t get this part? Really appreciate if anybody can help me with this.
Thanks a lot!
That is not the conception of revaluation. The purpose of revaluation model is to ensure that the carrying amount of the asset does not differ materially from the fair value at the reporting date.
Let me show you my approach in calculating PPE
@ cost value: $800,000
Accumulated depr: ($560,000)
CV @ (date): 240,000Revaluation @ (date): $600,000
Gain on revaluation $360,000Depreciation charge for the year: 600,000/5= (120,000)
CV @ y-end: 480,000Note that besides looking for hints from the question on excess depreciation transfer, must also see if the gain on revaluation needed to be transfer to deferred tax. *I am reminding myself actually.
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