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Q) The following details relate to an item of property owned by Alpha which is depreciated on a straight-line basis with no estimated residual value:
Estimated useful life at acquisition 6 years
Cost on 1 April 2016 $120000
Accumulated depreciation (two years) ($40000)
Carrying amount at 31 March 2018 $80000
Revaluation on 1 April 2018:
Revalued amount $112000
Revised estimated remaining useful life 5 years
Alpha makes an annual transfer from its revaluation surplus to retained earnings in respect of excess depreciation
What are the depreciation charge for the year ended 31 March 2019 and the balance on the revaluation surplus as at 31 March 2019?
A) Depreciation charge $16,000; revaluation surplus $25,600
B) Depreciation charge$16,000; revaluation surplus $32,000
C) Depreciation charge $22,400; revaluation surplus $25,600
D) Depreciation charge $22,400; revaluation surplus $32,000.
…..
In this question, what I have done, is the following,
About the first part, the old depreciation is 120000/6 = $20000, and the new depreciation after revaluation is 112000/5 = $22400.
About the second part, the asset was revalued after two years, leaving accumulated depreciation of $40000 (20000 × 2) which is deducted from 120000 to get carrying value of $80000. After that, the revaluation surplus is calculated by finding the difference between $112000 and $80000, which is $32000. After a year, on 31st March 2019, the excess depreciation of $2400 (22400-20000) is transferred to retained earnings from revaluation surplus. So the revaluation surplus balance after deducting this amount is $29600.
But as none of the options matched with my answer, I decided to select option D) which shows revaluation surplus balance of $32000 without deducting excess depreciation.
But the right answer given is option C). I can’t figure out how $25600 is obtained, and Iam starting to think it might be miscast instead of $29600. Can you please help me, sir ?
Sir, this is another question regarding revaluation surplus, please don’t confuse this with the previous question.
This is a bit of a trick question (and I really do not think this would happen in the exam).
There are two separate things. One is the revaluation and the other is the revising of the useful life.
If they had not revalued then the revising of the useful life would mean that the depreciation charge in future years would be 80,000/5 = 16,000 per year.
Due to the revaluation, the new depreciation charge is 22,400. So the excess depreciation is $6,400 and the balance on the revaluation surplus is $32,000 – $6,400 = $25,600.
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