Question

Topic: Revaluation and Change in Accounting Estimate

At the beginning of 2015, Cookie Inc. purchased a unit of machinery worth P5,000,000. The machine has an estimated useful life of 9 years with a 10% residual value. Tindalo depreciates the machine using the straight-line method. On December 31, 2018, Tindalo was informed that the machine had a gross replacement cost of P7,500,000. Residual value, as per company’s policy, is now 10% of the gross replacement cost, and its remaining useful life was revised to 8 years. The entity also revised its depreciation method to double-declining-balance.

1. How much is the revaluation surplus on December 31, 2018?

2. What is the asset’s depreciation for 2019?

3. How much of the revaluation surplus was transferred to retained earnings during 2019?

Answer 1

Depreciation per annum =( Asset cost - Salvage value) / life of asset

= 5,000,000 - 500,000) / 9

= 500,000 p.a

Rate of depreciation = (500,000 / 5,000,000 ) * 100 =10%

Depreciation from 2015 to 2018 = 500,000 * 4

= 2,000,000

1) Value of machinery on 31 Dec,2018 = 5,000,000 - 2,000,000

= 3,000,000

Therefore, the revaluation surplus is 7,500,000 - 3,000,000 = 4,500,000

2) Depreciation of asset for 2019 under double declining balance method

= 2 * cost of asset on date * rate of depreciation

= 2 * 7,500,000 * 10%

Depreciation ,2019 = 1,500,000

3) Revaluation surplus transferred to Retained earnings The amount transferred to Retained earnings is the difference between the depreciation before revaluation and depreciation after revaluation.

Depreciation ,if not revalued = 500,000

Depreciation ,after revaluation= 1,500,000

So, the difference of 1,000,000 is transferred to Reatained earnings during 2019