Revalution Surplus

jewels.p

Can anyone help me with this.

Company purchased a freehold warehouse on 1/1/2000 for £250,000. Decided to depreciate it over its estimated useful life of 50 years. On 1/1/2005 building is revalued at £345,000 & its decided to incorporate this valuation into the books of account from this date.

What is the amount to be transferred to Revaluation Surplus?

Then it asks assuming the asset life still has 46 years to run as from 1/1/2005 what would the depreciation charge be from 31/12/2005 onwards?

(It is not an assignment I have taken it from the Osborne Book I read the answers but dont understand how the calculations are done)

Any help appreciated

crispy

Hello,

Asset @ Cost 1/1/00 = 250,000
Less: Depn. Charge to 31/12/04 (250,000 / 50 * 5) = (25,000)
NBV @ 31/12/04 = 225,000

Revaluation @ 1/1/05 = 345,000

Transfer to Revaluation Reserve (345,000 - 225,000) = 120,000

Depn. charge from Year Ending 31/12/05 (345,000 / 46 Remaining Years) = 7,500

Steve Collings

Hi Jewels

I have assumed that depreciation is charged in the year of acquisition. So:

1.1.00 - cost = $250,000

Depreciation @ ($250,000 / 50 years) [or 2% x $250,000] = $5,000 per year, therefore for the year ending 31 December:

2000 = $5,000
2001 = $5,000
2002 = $5,000
2003 = $5,000
2004 = $5,000
Total = $25,000

At this point the building has a net book value of ($250,000 - $25,000) = $225,000. We have revalued the building to $345,000 so we can do the following journals:

DR cost of building $95,000 (ie $345,000 - $250,000)
CR revaluation reserve ($95,000)

Being uplift in cost of building

DR accumulated depreciation $25,000
CR revaluation reserve ($25,000)

Being reversal of accumulated depreciation

So the value of the revaluation reserve at this point (assuming a full year's depreciation charge in the year of acquisition ) = $120,000.

You can also prove this figure by saying:

NBV prior to revaluation = $225,000
Increase in valuation = $120,000
Revised valuation prior to depreciation charges = $345,000.

On the basis that the building has 46 years left to run, then the depreciation charges would be $345,000 / 46 years = $7,500 per annum. (Note based on my calculations, the building would have 45 years left to run [i.e. 50 years - 5 years depreciation charge] so the answer might not charge depreciation in the year of acquisition (i.e. 31.12.00). If this is the case then the revaluation reserve would be:

DR cost of building $95,000
CR revaluation reserve ($95,000)

Being uplift in original cost of building

DR accumulated depreciation $20,000
CR revaluation reserve ($20,000)

Being reversal of accumulated depreciation

Assuming only 4 years depreciation charged in the Osborne answer, then the revaluation reserve should be $115,000, though the depreciation charges as at 31 December 2005 should still be $345,000 / 46 years = $7,500 per annum.

Hope that clarifies the issue.

Kind regards
Steve

jewels.p

Thanks for the replies. I think I will have to study Chapter 4 again dont think I fully understand it yet.

In fact I may have to read the whole four Chapters of the Osborne Book again and see if it sinks in properly this time!