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30 June 2010 The freehold property was purchased for $300,000 on 30 June 2010. The building element in the cost was estimated at $12,000 with an estimated useful life of 40 years.
30 June 2011 The open market value of the property was estimated to be $380,000 (including building element of $160,000)
1 July 2011 The estimated useful life of the property at this date was revised to 50 years.
30 June 2012 The open market value of the property was estimated to be $290,000 (including building element of $100,000)
30 June 2010
Dr. Land 180,000
Dr. Building 120,000
Cr. Bank 300,00030 June 2011
Dr. Depreciation 3,000
Cr. Accumulated Depreciation – Building 3,000Dr. Land 40,000
Dr. Accumulated depreciation 3,000
Dr. Building 40,000
Cr. Revaluation Surplus(OCI) 83,00030 June 2012
Dr. Depreciation 3,200
Cr. Accumulated Depreciation 3,200Dr. Revaluation reserves 860
Cr. Retained earnings(43,000 / 50) 860Dr. Accumulated dep 3200
Dr. Reversal of revaluation surplus(30k + 43k – 0.86k)
Cr. Land 30,000
Cr. Building 60,000The above is the answer of this question. However, I don’t understand why Retained Earning is (43,000 / 50), where 43,000 come from?
Also, Why Reversal of revaluation surplus is (30k + 43k – 0.86k)? Why not deduct total 83,000 from revaluation surplus?
And then, why on 30 June 2012, the Land Cr. 60,000, but not ($290,000-$380,000)?
I am looking forward to hearing from you.Thank you!!!
“The above is the answer of this question. However, I don’t understand why Retained Earning is (43,000 / 50), where 43,000 come from?”
The $43,000 is in this journal entry:
Dr. Land 40,000
Dr. Accumulated depreciation 3,000
Dr. Building 40,000
Cr. Revaluation Surplus(OCI) 83,000from 30 June, 2011 the property value increased by $83,000 of which $43,000 related to the building and $40,000 was attributable too the land
“Also, Why Reversal of revaluation surplus is (30k + 43k – 0.86k)? Why not deduct total 83,000 from revaluation surplus?”
The value of the land fell by $30,000 (from ($380,000 – $160,000) down to ($290,000 – $100,000)) so that accounts for the $30,000 in the calculation “(30k + 43k – 0.86k)”
The land revaluation was $43,000 but, since then there has been a transfer from Revaluation Reserve to Retained Earnings of $43,000/50 ie $860 so there is only $42.140 still in the Revaluation Reserve that is attributable to the building
So it’s because the company has chosen to adopt the practice of crediting Retained Earnings annually by the amount by which the profits for the year have been reduced as a result of accounting (correctly) for the depreciation on the revalued amount and that move is effected each year by the entry:
Dr Revaluation Reserve
Cr Retained Earningsby this year’s share of that excess depreciation ie by $43,000/50 = $.86
“And then, why on 30 June 2012, the Land Cr. 60,000, but not ($290,000-$380,000)?”
I believe that you have misread the question here
Following the original revaluation the land had a value of $220 and the building had a value of $160
As a result of the next revaluation, the land value has fallen to $190 and the building value has fallen to $100
So, on the event of the reversal, the land needs to be reduced from $220 down to $190
OK?
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