Question

AT Travel Limited acquired a two-story building for use as an office on June 30, 2012 at $2 million. The building is expected to have a useful life of 20 years and a residual value of $100,000. The company used the straight-line method to depreciate the building. On July 1, 2013, the company paid $38,000 for the completion of the newly built car park lots at the back of the building. The market value of the building was estimated at $2.2 million and $2.5 million on June 30, 2013 and 2014 respectively Required: (1) Determine the carrying amount of the building as at June 30, 2013 and 2014 if the company used the cost method to account for the building Cost method: Carrying amount 30/6/2013 Carrying amount 30/6/2014 $ 1,905,000 $ 1,810,000 Summary of balances and charges: Building 30 Jun 2013 30 Jun 2014 $2,000,000 $ 1,905,000 190,000 Accumulated depreciation 95,000 $ 2013 2014 Depreciation expense 95,000 $ 95,000 (2) Determine the carrying amount of the building as at June 30, 2013 and 2014 if the company used the revaluation method to account for the building where the balance of the accumulated depreciation on date of revaluation is adjusted using (a) Write-off method Carrying amount 30/6/2013 Carrying amount 30/6/2014 Summary of balances and charges: 30 Jun 2013 30 Jun 2014 Building Accumulated depreciation Revaluation reserve (equity) 2013 2014 Depreciation expense Revaluation surplus (OCI) (b) Proportionate restatement method: Carrying amount 30/6/2013 Carrying amount 30/6/2014 Summary of balances and charges: 30 Jun 2013 30 Jun 2014 Building Accumulated depreciation Revaluation reserve (equity) 2013 2014 Depreciation expense Revaluation surplus (OCI)

Answer 1

We need to use Revaluation Method to account for the building. As per this method'

Value @ end of year = Value @ beginning of year + Additions to Asset - Deductions to Asset - Depreciation Charge.. (a)

The Value in the above equation is the book value or carrying value and not the market value of the asset.

2. (a) In this part we have to make calculations using Write Off (or Written Down) Method of calculating depreciation.

According to this method, Depreciation is calculated as follows:

Depreciation Rate = 1 - (Residual Value/ Cost of Asset)^(1/n); where n = useful life of asset

i.e. a fixed depreciation rate is charged on the carrying value (or book value) of the asset in that year. This implies that the depreciation charge reduces year on year.

So, for this case, Depreciation Rate, R= 1- (100,000/2,000,000)^(1/20) = 1 - 0.86089 = 0.139108 or 13.9108 % per year

Thus, Carrying amount @ 30/06/2013 = 2,000,000 - 13.9108%*2,000,0000 = 1,721,784$

And @ 30/06/2013, Accumulated Depreciation = 278,216 $, Revaluation Reserve = 0$, Depreciation = 278,216 $,

Revaluation Surplus (OCI) = Market Value - Carrying value = 2,200,000 - 1,721,784 = 478,216$

Similarly, Carrying amount @ 30/06/2014 = 1,721,784 + 38,000 - 13.9108%*(1,721,784 + 38,000) = 1,514,984 $,

And @ 30/06/2014, Accumulated Depreciation = 523,016 $, Revaluation Reserve = 478,216 $, Depreciation = 244,800$,

Revaluation Surplus (OCI) = Market Value - Carrying Value + Revaluation Reserve = 446,800$ (Market Value = 2,500,000$)