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property was acquired on 1.1.x1 for 250,000, being 200,000 for the bldg and 50,000 for the land. the bldg had a useful life of 50 years.
on 1.1. x6, the property was revauled and resulted in an increase of 100,000 to the CV of the bldg and 50,000 to the CV of the land.
useful life is unchanged.what is the depreciation charge for the year x6?
the answer given is: 280,000/45 = 6222
where 280000 is the CV of the bldg.
i thought the new depreciation will be computed as 300,000/45??
pls explain.. thank u in adv
The building at 1 January, 2001 was $200,000 and was to be depreciated at 2% per annum
On 1 January, 2006 it was revalued by $100,000
What was the carrying value immediately before revaluation?
It has suffered 5 years depreciation at the rate of 2% per annum = 10%
And 10% x $200,000 = $20,000
So carrying value at 1 January, 2006, immediately before revaluation, was $180,000 and the increase of $100,000 takes it to $280,000
That asset now only has a remaining useful life of 45 years.
Ok now?
but in f3, we learnt that the new depreciation was new cost/remaining life
🙁
Yes, new cost is 180,000 + 100,000 = 280,000
Divide by 45 and Bob’s your uncle
slightly hard to accept the uncleness of Bob – especially when u have been told he is ur nephew.
the following extract is from kaplan f3 text, which i took last oct and am pretty sure that no scientific breakthroughs have occurred since then:
“eddie owns a retail shop in central springfield. he bought it 25 years ago for 100,000, depreciating it over 50 years. at the start of X6 he decides to revalue the unit to 800,000. the remaining useful life is 25 years.
what are the accounting entries for x6?
on revaluation, start of x6:
Dr. Retail unit cost 800,000
dr Accum. dep 50,000
cr reval reserve 750,000depreciation for x6:
dr depreciation expense (800,000/25) 32,000
cr accum. dep 32,000reserve transfer:
dr reval reserve (32,000-2000) 30,000
cr retained earnings 30,000
”end of extract.
as u can see, the depreciation calculated is the revalued amt/remaining years, where the revalued amount is the new cost (800,000).
pls put uncle in a line up and identify
Ok, forgetting uncles (because you seem to think that you are Bob’s uncle whereas you are in fact his nephew) let’s get back to that questionable journal entry of
Dr. Retail unit cost 800,000
dr Accum. dep 50,000
cr reval reserve 750,000Now, do you want to play “Hunt the deliberate mistake”? Or do you want me to point it out to you?
Ok, so let’s try again. The entry should be
Dr Accumulated depreciation 50,000
Dr Retail Unit account 700,000
Cr Revaluation Reserve 750,000First year depreciation entries are
Dr Depreciation expense account 32,000
Cr Accumulated Depreciation account 32,000and
Dr Revaluation Reserve (750,000/25) 30,000
Cr Retained Earnings. 30,000and, as you can see, depreciation is based on the “new cost” of old net book value of (100,000 – 50,000) together with the revaluation increase of 750,000 = 800,000
It’s unfortunate that Kaplan have given the example where accumulated depreciation is the same value as the net book value as at date of acquisition but I can’t do anything about that!
Ok? And say “Hi” to Uncle Bob
unbelievable on kaplans part. so.. its always cv/remaining life. got it.
thank u very much!
i am quite sure now that my low score of 82 in f3 had something to with this…
err…. that 800k was my typing mistake… 🙁 i just went over it again.
but the rest is all correct…very very sorry.
my bad ….
but
as u can see … when they show dep as 800,000/25, i just took it to mean whatever the final value of the asset is, just use that.
i am guessing that its just a coincidence that “new cost” is the same as CV+revalued amount
NO! The question tells you that the asset is to be revalued TO $800,000 so that’s the numerator for the depreciation calculation and 800,000/25 = 32,000 and that’s the figure for the depreciation charge for the next 25 years
Are you sure that you’re on top of this?
If there’s any doubt at all in your mind, let’s clear it up now rather than let it fester
and if i use the same argument for the original question of this post, the bldg is revalued TO 300,000. thus i shd use this as the numerator.
so why r we using 280,000 in this example and 800,000 in the kaplan example.
this is my sticking point
280,000 is made up of net book value before revaluation (180,000) + revaluation increase (100,000)
800,000 is made up of net book value before revaluation ( 50,000) + revaluation increase (750,000)
Er, what’s the difference that you’re stuck with?
let me just go over your explanations and i will get back to u…
thanks for being patient
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