Hi can anyone help me with this calculation::confused:

At 31 December 2004 Q a limited liability company, owned a building that cost $800,000 on January 1 1995, it was being depreciated at 2% per year. On January 1 2005 a revaluation to $1,000,000 was recognized, at the date the building has a remaining useful life of 40 years. What is the depreciation charge for the year ended 31 December 2005 and the revaluation reserve balance as at January 2005?

My Working:
1,000,000/40 = 25,000 is the depreciation charge for year ended 31 December 2005, but the revaluation reserve is giving me some problem with the calculation.

1) The depreciation charge for the year is 2% of $1,000,000 = $20,000.
WHY divide by 40, 2% is divide by 50.

2) The revaluation reserve balance as at January 2005 is $200,000.
The revaluation reserve is simply the
difference of the revalued asset and its former value.

3) Please note that the revaluation
reserve in the future is affected by the revaluation of the depreciation as well.

Depreciation for the year ended December 31, 2005 is $25,000. Your working is correct since the depreciable cost now is $1,000,000 and the remaining useful life is 40 years.

The company has revalued the asset on January 1, 2005 at $1,000,000, The carrying value on that date before revaluation is:

Cost of the asset $800,000
Accumulated depreciation @2% per year for 10 years $160,000
Net book value $640,000

Revaluation reserve is $360,000 computed as follows:
Revalued amount $1,000,000
Carrying value $640,000
Revaluation reserve $360,000

Now according to IAS 16 Property, Plant and Equipment you can transfer the excess depreciation from the revaluation reserve to retained earnings (and not to income statement). In this case the excess depreciation is the difference between depreciation based on revalued amount and the depreciation on original cost.

Current Depreciation $25,000
Depreciation on cost $16,000
Excess depreciation $9,000

Balance Sheet will report

Property, Plant and Equipment $1,000,000
Accumulated depreciation $25,000
Net Book Value $975,000

Revaluation Reserve $360,000
Less Transfer to Retained earnings $9,000
Net balance $351,000

Thank you a lot your explanation was very helpful.

Quote:

---

Originally Posted by rehmanvohra

Depreciation for the year ended December 31, 2005 is $25,000. Your working is correct since the depreciable cost now is $1,000,000 and the remaining useful life is 40 years.

The company has revalued the asset on January 1, 2005 at $1,000,000, The carrying value on that date before revaluation is:

Cost of the asset $800,000
Accumulated depreciation @2% per year for 10 years $160,000
Net book value $640,000

Revaluation reserve is $360,000 computed as follows:
Revalued amount $1,000,000
Carrying value $640,000
Revaluation reserve $360,000

Now according to IAS 16 Property, Plant and Equipment you can transfer the excess depreciation from the revaluation reserve to retained earnings (and not to income statement). In this case the excess depreciation is the difference between depreciation based on revalued amount and the depreciation on original cost.

Current Depreciation $25,000
Depreciation on cost $16,000
Excess depreciation $9,000

Balance Sheet will report

Property, Plant and Equipment $1,000,000
Accumulated depreciation $25,000
Net Book Value $975,000

Revaluation Reserve $360,000
Less Transfer to Retained earnings $9,000
Net balance $351,000

---

Hi - just asking about transferring the excess depreciation from revaluation reserves to retained earning - I find it abit weird because when we transfer the excess depreciation, we are effectively following the old depreciation expense (prior to revaluation).

Effectively, when we transfer the $9,000 from revaluation reserves to retained earnings;
Dr. revaluation reserves $9,000
Cr. Retained earnings $9,000
Effectively, we are just following the old depreciation expense of $16,0000.
This is because new depreciation ($25,000) transferred to retained earnings; Dr. retained earnings $25,000 and from there, Cr. Retained earnings $9,000 as transfer of excess depreciation. Hence, we are just effectively using the old depreciation expense of $16,000.

Also, why do we need to transfer excess depreciation? I mean... I just cannot get the logic.

Please help as my exams is coming up soon.

You do have a valid point. May I suggest reference to IAS 16 - Property, Plant and Equipment, especially paragraphs 31 - 40 which deal with revaluation model.

Paragraph 35 is of relevance and is reproduced below:

35 When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is treated in one of the following ways:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to determine its depreciated replacement
cost.
(b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings.

I do hope that meets your requirement.

I cannot understand the IAS16 Paragraph 31-40, does it explain whey the excess of depreciation can transfer from revalution reserve to retain earning?

When the excess depreciation is transferred to "Retained Earnings" it is not the same as transfer to comprehensive income (income statement). Please try to understand that when a revaluation reserve is recognized it is an "Unrealized gain". A firm can not utilize the amount to pay dividends. What effectively is being done is to recognize the realized gain to the extent of excess depreciation in the revaluation reserve.