Dear Mike,
I take an example of revaluation adjustment and I don't understand the logic why we should do that. Could you explain it for me, please?
Question:
An asset is bought for 1,000 (10yr UEL).
2 years later it is revalued to 1,000.
One year after that it is impaired to 400.
What is the double entry for this impairment?
Answer:
Calculate the Depreciated Historic Cost
DHC would be 1,000 less 3 years of depreciation = 700
Calculate the NBV just before the Impairment
NBV at date of impairment = 1000 NBV one year earlier.
So 1,000 less depreciation of (1,000 / 8) = 125 => 875
Now calculate the difference between step 2 and the amount to be impaired to
Impair to 400.
So from 875 to 400 - credit Asset 475
Accounting treatment
Dr RR with any amount above the DHC of 700. So 875-700 = 175
Dr I/S with any amount below DHC of 700. So 700-400 = 300
Dr I/S 300
Dr RR 175
Cr PPE 475
Thank you very much,
Ask the Tutor ACCA FR
REVALUATION ADJUSTMENT
So which part are you unclear about?
I don't understand the logic behind final step. The double entry is :
Dr I/S 300
Dr RR 175
Cr PPE 475
I think Dr RR 200 to reverse RR of previous period and then the remaining amount to Dr I/s ?
When 200 was credited to Revaluation Reserve (RR), good practice would have seen our entity make a transfer out of RR to Retained Earnings representing the additional depreciation charge that resulted fro the revaluation
Over a life time of 8 years that means that there should have been a transfer from RR to Ret Ears of 25 (200/8) in that third year, just before we impair the asset bringing that RR balance down to 175 and that's the limit that we should now be reversing as a result of this unfortunate impairment
Does that do it for you?
It's very helpful for me.
Thank you for your enthusiasm to answer all my questions.
You're very wonderful. :)
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