Q

Reflect the revaluation of the asset and the subsequent depreciation of the revalued asset

Home, - Which of the equity accounts would be affected

Question: An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240 000 at the beginning of the year. Depreciation for the year is based on the revalued amount and the remaining useful life of eight years. Shareholders' equity, before adjusting for the above revaluation and subsequent depreciation, is as follows:

Share capital

600 000

Revaluation surplus

90 000

Capital profits reserve

170 000

Retained earnings

140 000

Total

1 000 000

Required: Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Which of the equity accounts would be affected directly or indirectly by the revaluation?

ANSWER:
The total revaluation increment generally highlights the difference in value between the carrying amount and the fair value of an asset. Thus, for the given scenario the total revaluation increment will be-
$240 000 - ( $200 000 - $40 000 ) = $ 80 000

Required Journal Entries for the revaluation of the asset and accumulated depreciation

Particulars

L/F

Debit ( Dr )

( Amount in $ )

Credit ( Dr )

( Amount in $ )

Accumulated depreciation A/c

 

$40,000

 

To Assets A/c

 

 

$40,000

( Being offset of the accumulated depreciation

against the considered asset )

 

 

 

 

 

 

 

Asset A/c

 

$80,000

 

To Gain on revaluation A/c

 

 

$80,000

( Being to recognise the revaluation )

 

 

 

 

 

 

 

Gain on revaluation A/c

 

$80,000

 

To Revaluation Surplus A/c

 

 

$80,000

( Being transfer of gain to revaluation surplus

at the end of accounting period )

 

 

 

Table 1: Journal entries

The above table (Table 1) has presented the journal entries for reflecting the revaluation of the asset and the subsequent depreciation of the considered revalued assets.

From the given journal entries, it can be identified that from the shareholders' equity accounts the revaluation surplus would be affected directly. Due to the revelation the gain on revaluation account balance, that is $80,000, is required to be transferred to revaluation surplus account at the end of the considered accounting period. In this process, it is essential to highlight that the total value of the revelation surplus of the entity at the end of the period would be $170,000 (i.e., $90,000 + $80,000). This, in turn, would also increase the overall total value of the shareholders' equity of the organisation to $1,080,000.

Calculation of value of total shareholders' equity at the end of the period

Details

Amount ( in $ )

Share capital

$600,000

Revaluation surplus

$170,000

Capital profits reserve

$170,000

Retained earnings

$140,000

Total

$1,080,000


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