Question

What effect will an asset revaluation have on subsequent periods’ profits? Explain your answer.

Answer 1

ANSWER:

Effect will an asset revaluation have on subsequent periods' profit as under:

1) If upward revaluation of depreciable asset has been undertaken, the depreciation will be calculated on the increased value of asset and hence subsequent profits' will be lower.

2) On the other hands downward revaluation of depreciable asset has been undertaken, subsequent profits will be higher because of lesser depreciation expense recorded on decresed value of assets in the income statement.

3) Profit on sale of the asset before completion of its useful life will be lower.

eg if the company revalued the building $300,000 which cost is only $200,000, the difference of $100,000 is transfered to revaluation account. And the same building sold at $400,000 the profit will be recorded as $100,000 only and not $200,000.