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Dear tutor,
We have the following information.
List price if machine. 8550
Trade discount. (855)
Delivery costs. 105
Set up costs. 356
8156
1.Expected life of machine 12 years and residual value is 2000.2.xavier accounting policy is to depreciate full year charge in the year of purchase and no depreciation in the year of retirement.
3.xavier has a policy of keeping all equipment at revalued amounts. No revaluation haa been necessary until September 2018 when one of the major suppliers went bankrupt causing a rise in prices. A specific market value for Xavier machine was not avaibale but an equivalent machine would now cost 15.200.xavier treats revaluation surpluses as beeing realised through use of the asset and transfers them to retained earnings over the life of the asset. The remaining useful life and residual value of the machine remained the same .
4.xavier year’s end is September.
1.Required what is the carrying amount of ppe at September 2015.
2. Required what is the carrying amount of ppe at 30 September 2018.
3. What is the balance on the revaluation surplus at September 2018.
At requirement 2 the correct answer is 10.800. the working is.
Replacement cost. 15.200
Depreciation (15.200-2000) *4/12=4.400Depreciated replacement cost is therefore 10.800.
So my question is from the moment we have revalued the asset don’t we calculate depreciation based in the remaining useful life left ? In this case 8 years.
Why have they calculated the depreciation again from the moment we have already accounted for this before the asset was revalued?
Thank you.
Hi,
You are correct in your understanding about depreciating a revalued asset over its remaining useful life however this in not what is being done in the question.
In the question they are calculating the fair value of the asset at revaluation using the depreciated replacement cost of the asset. This is done when an asset is specialised in nature and there is no reliable fair value for it. To work out the depreciated replacement cost we need to look at the cost we would incur to replace the asset today, which would be more than its original cost initially, and then depreciate it using the initial useful life to work out what the value should be today.
Once we have the depreciated replacement cost, which in this example is 10,800, then this will be depreciated over the remaining useful life.
Hope that clears it up.
Thanks
Just to hijack this thread a little, using the SBR illustration for depreciated replacement cost in the lecture notes (p.44), does the $2.5m in that illustration go to SFP (OCE)?
Additionally, does the depreciation on the replacement cost ($7.5m in the illustration) just go to the SPL?
I was stuck on this question from past 4 – 5 hours, and finally found your explanation and it solved my doubt. Thank u so much sir. Hats off.
Kyle wrote:Just to hijack this thread a little, using the SBR illustration for depreciated replacement cost in the lecture notes (p.44), does the $2.5m in that illustration go to SFP (OCE)?
Hi,
Yes the depreciated replacement cost is effectively the revalued amount that appears on the SFP, which is then depreciated over the remaining useful life.
Any increase in value up to the depreciated replacement cost is a gain and goes through OCI as normal.
Thanks
Hi,
The first Required tells us to find the carrying amount of ppe at 30 September 20X5.In the Workbook answer Section they have included the Trade discount in the cost and and deducted accumulated depreciation from the cost.
Cost ( 8559-855 + 105 +356) = $8,156
Accumulated Depreciation= ($513)
Carrying Amount of PPE = $7,643As per IAS , IAS 16 lists the components that make up the cost of an item of property, Plant and eqipment as follows.
i) Purchase price, including any import duties paid, but excluding any trade discount and sales tax paid.
My question is, Why is Trade discount included in the cost calculation in this question?
The best way to think about it is that we capitalise the net price paid. The narrative in the standard is a bit confusing and is looking at it from the perspective that if we are capitalising the net price paid, i.e. after the trade discount, then we do not subsequently capitalise/add back the trade discount.
In this question we are not given the net price paid but the list price and the trade discount, so need to find the net price paid. To do this we deduct the trade discount from the list price and then capitalise this amount.
Thanks
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