ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 6: Non-current assets
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On 2 January Year 5, Entity X bought a new car costing $50,000. The car dealer
accepted a car owned by Entity X in part-exchange, and the part-exchange value of
this old car was $4,000. This car originally cost $30,000 and its accumulated
depreciation is $25,000.
Required
(a) Calculate the gain or loss on disposal of the old car
(b) Show how the purchase of the new car and the disposal of the old car will be
recorded in the ledger accounts of Entity X.
Answer
(a)
$ $
Saleproceedsondisposal(part‐exchangevalue)4,000
LessDisposalcosts0
Netdisposalvalue 4,000
Assetatcost 30,000
Less:Accumulateddepreciation (25,000)
Netbookvalueatdateofdisposal (5,000)
Lossondisposal(1,000)
(b)
Disposalofassetaccount
$
$
Motorvehiclesaccount 30,000 Accumulateddepreciation
account
25,000
Motorvehiclesaccount
(Trade‐invalue) 4,000
Lossondisposal(income
statement)
1,000
30,000 30,000
Motorvehiclesaccount
1January
$
$
Openingbalance 200,000 Disposalaccount 30,000
Bank(50,000–4,000) 46,000
Disposalofassetaccount 4,000 Closingbalance 220,000
250,000 250,000
2January
Openingbalance 220,000
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Accumulateddepreciationaccount
1January
$
$
Disposalaccount 25,000 Openingbalance 80,000
Closingbalance 55,000
80,000 80,000
2January
Openingbalance 55,000
Bankaccount
$
$
Motorvehiclesaccount 46,000
(Cashpaidfornewcar)
Incomestatement
$ $
Disposalaccount 1,000
(Lossondisposal)
Exercise 6
A company has several motor cars that are accounted for as non-current assets. As
at 1 January Year 2, the cost of the cars was $120,000 and the accumulated
depreciation was $64,000.
During January the company bought a new car costing $31,000 and was given a part-
exchange allowance against an old car that was sold of $8,000. This car being sold
originally cost $28,000 and its accumulated depreciation is $18,000.
Required
(a) Calculate the gain or loss on disposal of the old car
(b) Show how the purchase of the new car and the disposal of the old car will be
recorded in the ledger accounts.
Chapter 6: Non-current assets
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Revaluation of non-current assets
Revaluation and the entity’s accounting policy
Accounting for revaluation
Revaluation: book-keeping entries
Depreciation of a re-valued asset
Depreciation of a re-valued asset: transfer of excess depreciation
Revaluation model: the frequency of revaluations
Disposal of a re-valued non-current asset: gain or loss on disposal
5 Revaluation of non-current assets
5.1 Revaluation and the entity’s accounting policy
A non-current asset is recognised in the accounting records at cost when it is first
acquired. IAS 16 states that an entity should choose one of two valuation models for
its non-current assets after acquisition. The same valuation model should be applied
to all assets in the same class.
The two valuation models for non-current assets after acquisition are:
the cost model (i.e. cost less accumulated depreciation)
the revaluation model (i.e. revalued amount less accumulated depreciation since
the most recent revaluation).
For example, a company’s policy might be to value all its motor vehicles at cost, but
to apply the revaluation model to all its land and buildings.
Revaluation of non-current assets is uncommon in sole trader businesses, because
the business owner is not usually interested in having information about the fair
value of the non-current assets in the financial statements. The cost of obtaining the
information does not justify the benefits. However, revaluation of some categories
of non-current assets, particularly land and buildings, is common with companies.
5.2 Accounting for revaluation
When a non-current asset is re-valued, its ‘carrying amount’ in the statement of
financial position is adjusted from net book value to a fair value. Fair value is
normally current market value.
When an asset is re-valued:
The asset is recorded at its new value in the asset account
The amount by which the new value exceeds the net book value of the asset is
transferred to a revaluation reserve account.
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The increase in value, known as a revaluation gain, is not reported in the
income statement as a profit.
The revaluation surplus account is a non-distributable reserve. The increase in
value cannot be used to pay a dividend to shareholders. However, the reserve is
a part of shareholders’ total capital.
Example
A building owned by a company was purchased a year ago. Its carrying amount in the
company’s statement of financial position at cost $9 million less accumulated
depreciation of $100,000. The company’s policy is to apply the revaluation model to all
its land and buildings. A current valuation of this building is now $9.6 million, and the
asset will be re-valued.
The building will now be valued in the asset account at $9.6 million.
The accumulated depreciation on the building is reduced to zero.
Future depreciation on the building will be based on the re-valued amount (the
value of the building within the total valuation of $9.6 million for the land and
building).
The asset has been re-valued from its net book value of $8.9 million to $9.6
million. The surplus of $0.7 million on revaluation should be transferred to a
revaluation reserve. The surplus must be transferred directly to the revaluation
reserve, and must not be reported as a gain or profit in the income statement for
the period.
5.3 Revaluation: book-keeping entries
In much the same way that a disposal of asset account is used to establish the gain
or loss on disposal of a non-current asset, a revaluation account is used to establish
the amount to transfer to the revaluation reserve when an asset is re-valued.
The double entry transactions required are as follows.
(a) Transfer the cost (or valuation) of the non-current asset from the asset account
to the revaluation account:
Debit: Revaluation account
Credit: Non-current asset account (asset at cost or most recent valuation)
(b) Transfer the accumulated depreciation on the asset from the accumulated
depreciation account to the revaluation account. This is the accumulated
depreciation since the most recent revaluation of the asset.
Debit: Accumulated depreciation account (or Allowance for depreciation
account)
Credit: Revaluation account
Chapter 6: Non-current assets
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(c) Record the fair value of the asset in the asset account and the revaluation account
Debit: Non-current asset account (fair value of the asset = re-valued amount)
Credit: Revaluation account
(d) Transfer the balance on the revaluation account to the revaluation surplus
account (which is a part of equity in a company’s statement of financial
position).
Debit: Revaluation account
Credit: Revaluation reserve account
The balance on the revaluation account is now zero, and the account can be closed.
Revaluationaccount
DebitCredit
Assetaccount:assetatcostorprevious
revaluation
Accumulateddepreciationtodate
Balancetorevaluationreserve(=debit
entry,providedthattherevaluationis
upwards)
Assetaccount:assetatre‐valuedamount
Non‐currentassetaccount
Debit Credit
Revaluationaccount:assetatre‐valued
amount
Revaluationaccount:assetatcostor
previousrevaluation
Accumulateddepreciationaccount
Debit Credit
Revaluationaccount:accumulated
depreciationtodate
Revaluationreserve
Debit Credit
Revaluationaccount:amountofthe
revaluation(iftherevaluationisupwards)
Example
An office building was purchased four years ago for $3 million. The building has
been depreciated by $100,000. It is now re-valued to $4 million. Show the book-
keeping entries to record the revaluation.
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Answer
Revaluationaccount
$ $
Buildingaccount 3,000,000 Accumulated
depreciation
100,000
Revaluationreserve
(=balancingfigure)
1,100,000 Buildingaccount 4,000,000
4,100,000 4,100,000
Buildingaccount
$ $
Openingbalanceb/f 3,000,000 Revaluationaccount 3,000,000
Revaluationaccount 4,000,000 Closingbalancec/f 4,000,000
7,000,000 7,000,000
Openingbalanceb/f 4,000,000
Accumulateddepreciationofbuildingaccount
$ $
Revaluationaccount 100,000 Openingbalanceb/f 100,000
Revaluationreserve
$ $
Revaluationaccount 1,100,000
Exercise 7
A company owns a building which was purchased three years ago for $1 million.
The building has been depreciated by $60,000. It is now to be re-valued to $2
million. Show the book-keeping entries to record the revaluation.
5.4 Depreciation of a re-valued asset
After a non-current asset has been re-valued, depreciation charges are based on the
new valuation.
Annual depreciation = Re-valued amount – Expected residual value
(straight-line method)
Expected remaining useful life
Example
An asset was purchased three years ago, at the beginning of Year 1, for $100,000. Its
expected useful life was six years and its expected residual value was $10,000. It has
now been re-valued to $120,000. Its remaining useful life is now estimated to be
three years and its estimated residual value is now $15,000. The straight-line method
of depreciation is used.
Chapter 6: Non-current assets
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Required
(a) What is the transfer to the revaluation reserve at the end of Year 3?
(b) What is the annual depreciation charge in Year 4?
(c) What is the net book value of the asset at the end of Year 4?
Answer
Annual depreciation originally (for Years 1 – 3)
= $(100,000 – 10,000)/6 years = $15,000.
$
Cost 100,000
Less:Accumulateddepreciationatthetimeof
revaluation(=3yearsx$15,000) (45,000)
Netbookvalueatthetimeoftherevaluation 55,000
Re‐valuedamountoftheasset 120,000
Transfertotherevaluationreserve 65,000
Revised annual depreciation = $(120,000 – 15,000)/3 years = $35,000.
The annual depreciation charge in Year 4 will therefore be $35,000.
$
Re‐valuedamount 120,000
Less:depreciationchargeinYear4 (35,000)
NetbookvalueattheendofYear4 85,000
5.5 Depreciation of a re-valued asset: transfer of excess depreciation
When an asset is re-valued upwards and depreciation is based on the re-valued
amount of the asset, the annual depreciation charge will be higher than it would
have been if the asset had not been re-valued but had been valued at historical cost.
Excess depreciation is the difference between:
the depreciation charge on the re-valued amount of the asset, and
depreciation that would have been charged on historical cost.
Each year, there should be a transfer of the excess depreciation for an asset from
the revaluation reserve to the retained profits reserve:
Debit: Revaluation reserve
Credit: Retained profits
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Example
An asset was purchased two years ago at the beginning of Year 1 for $600,000. It had
an expected life of 10 years and nil residual value. After two years it is re-valued to
$640,000.
For the first two years annual depreciation is $60,000 (= $600,000/10 years) and at
the end of Year 2, its carrying value is $480,000. The revaluation to $640,000 can be
achieved by making the following book-keeping entries:
Debit: Asset account: $40,000
Debit: Accumulated depreciation account $120,000
Credit revaluation reserve $160,000
The asset has 8 more years of expected life, so the annual depreciation charge will
increase from $60,000 to $80,000 (= $640,000/8 years). There will be excess
depreciation each year of $20,000.
Each year, unless the asset is re-valued again, there should be a transfer between the
revaluation reserve and retained profits:
Debit: Revaluation reserve $20,000
Credit: Retained profits $20,000
The reason for this transfer is to avoid an odd situation in which the revaluation
reserve for an asset could remain unchanged as long as the asset is still owned,
regardless of how long it has been used. In the example above, suppose the asset is
not re-valued again during its life, and eight years after the revaluation the asset has
a carrying value of $0 because it is fully depreciated.
The asset account has a debit balance of $640,000.
The accumulated depreciation account has a credit balance of $640,000.
If there is no transfer of excess depreciation, the revaluation reserve would still
have a credit balance of $160,000, even though the asset is now fully depreciated.
This is not sensible accounting.
By making a transfer each year of $20,000 excess depreciation from the
revaluation reserve to retained profits, by the end of the asset’s expected life,
there would have been a total transfer of $160,000 from the revaluation reserve.
The revaluation reserve for the asset would be reduced to $0 and realised profits
(retained profits reserve) will have been increased by the $160,000 of excess
depreciation charged through profit and loss.
5.6 Revaluation model: the frequency of revaluations
When the revaluation model is applied to the valuation of non-current assets, the
frequency of revaluations should depend on the volatility in the value of the assets
concerned. When the value of assets is subject to significant changes (high
volatility), annual revaluations may be necessary.
This ‘rule’ about the frequency of revaluations applies to both tangible non-current
assets (IAS 16) and to intangible assets (IAS 38).
Chapter 6: Non-current assets
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5.7 Disposal of a re-valued non-current asset: gain or loss on disposal
When a non-current asset that has been re-valued is eventually disposed of, there is
a gain or loss on disposal. This is calculated as:
SalevalueondisposalA
Lessdisposalcosts(B)
Netdisposalproceeds(A–B=)X
Re‐valuedamount C
Accumulateddepreciationsincerevaluation (D)
Netbookvalueatthedateofdisposal(C– D=)(Y)
Gainorlossondisposal(X–Y)
This gain or loss on disposal is reported in the income statement.
Adjusting the revaluation reserve
In addition, the amount by which the asset has been re-valued (minus any excess
depreciation already transferred) which is a credit balance in the revaluation reserve
(= non-distributable unrealised profit) is transferred to the retained earnings
account (= distributable realised profit).
Debit: Revaluation reserve
Credit: Retained earnings
The gain from the increase in value has been realised as a result of the asset
disposal, and so is transferred to a realised profits reserve (= retained earnings).
However, it is transferred directly to retained earnings and is not reported in the
income statement for the year.
Example
A non-current asset was purchased at a cost of $800,000. It had an expected life of
eight years and no residual value. Straight-line depreciation is used; therefore
annual depreciation was initially $100,000 per year.
After two years the asset was re-valued to $840,000. Its net book value (carrying
value) at this date was $600,000 (= cost less accumulated depreciation of $200,000);
therefore $240,000 was transferred to the revaluation reserve.
$
Newvaluation 840,000
Netbookvalueatthetimeoftherevaluation 600,000
Transfertotherevaluationreserve 240,000
The revaluation was accounted for as follows.
Debit: Asset account $40,000
Debit: Accumulated depreciation $200,000
Credit: Revaluation reserve $240,000.
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In the next year, since the asset had a remaining life of six years, annual
depreciation was $140,000 (= $840,000/8 years). Excess depreciation was therefore
$40,000 (= $140,000 - $100,000). In each of the next two years, there was a transfer of
the excess depreciation from revaluation reserve to retained profits:
Debit: Revaluation reserve $40,000
Credit: Retained profits reserve $40,000
After two years the asset was sold for $670,000 (net of disposal costs).
$$
Salevalueondisposal670,000
Re‐valuedamount 840,000
Accumulateddepreciationsincerevaluation (280,000)
Netbookvalueatthedateofdisposal(C– D=)(560,000)
Gainondisposal110,000
This gain is reported in profit and loss for the year.
The remaining balance on the revaluation reserve for this asset is $160,000.
$
Originalcredittorevaluationreserve 240,000
Less:Excessdepreciationsincetransferredtoretainedprofits (80,000)
Remainingcreditbalancefortheassetinrevaluationreserve 160,000
When the asset is disposed of, this remaining credit balance is transferred to retained
profits, but is not reported within profit and loss for the year.
Debit: Revaluation reserve $160,000
Credit: Retained profits reserve $160,000
The entire amount of the revaluation has now been transferred to realised profits
(retained profits) from unrealised profits (revaluation reserve), and the revaluation
reserve for the asset is $0.