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Hello Sir, in the consolidation question there’s an adjustment to PPE I’m unable to understand.
Robby purchased PPE for $10 million on 1 June 2009. It has an expected useful life of 20 years and is depreciated on the straight-line method. On 31 May 2011, the PPE was revalued to $11 million. At 31 May 2012, impairment indicators triggered an impairment review of the PPE. The recoverable amount of the PPE was $7·8 million. The only accounting entry posted for the year to 31 May 2012 was to account for the depreciation based on the revalued amount as at 31 May 2011. Robby’s accounting policy is to make a transfer of the excess depreciation arising on the revaluation of PPE.
I’ve calculated an impairment loss of 2.59 million correctly but I’m unable to understand the Transfer to Retained Earnings figure of 1.89.Upon revaluation, the double entry was:
Dr TNCA
Cr Revaluation Reserve with $2mCarrying value at May 2011 is $11m and Revaluation Reserve is $2m
One year later, depreciation on $11m is $611,111 (over 18 years) so carrying value is now $10,388,888 but the asset is impaired 🙁
The company compensates retained earnings to the extent of the extra depreciation caused by the revaluation exercise. That extra amount is $2m / 18 years = $111,111 so Revaluation Reserve now stands at $1,888,889
We need to impair the asset down to $7.8m and the double entry will be:
Dr Revaluation Reserve $1,888,889 ($1.89 per your post)
Dr Profit or loss $700,000
Cr TNCA $2,588,889 ($2.59 per your post)Is that any better?
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