Question

Question 1                                                                                                                                                            

An item of depreciable machinery is acquired on 1 July 2015 for $400 000. It is expected to have a useful life of 10 years and a zero-residual value (straight-line basis). On 1 July 2019, it is decided to revalue the asset to its fair value of $300 000.

Required

Provide journal entries to account for the revaluation

Answer 1

Depreciation under Straight line method = (Cost - Residual value) / Estimated useful life

Depreciation for 2015 = ($400,000 - $0) / 10 * 6 / 12 = $20,000

Depreciation for 2016 = ($400,000 - $0) / 10 = $40,000

Depreciation for 2017 = ($400,000 - $0) / 10 = $40,000

Depreciation for 2018 = ($400,000 - $0) / 10 = $40,000

Depreciation for 2019 = ($400,000 - $0) / 10 * 6 / 12 = $20,000

Accumualted depreciation at July 1, 2019 = $20,000 + $40,000 + $40,000 + $40,000 + $20,000 = $160,000

Carrying value at July 1, 2019 = $400,000 - $160,000 = $240,000

Revaluation reserve = $300,000 - $240,000 = $60,000

Journal entry

	Debit	Credit
Building	$60,000
Revaluation reserve		$60,000