Basic calculation process of depreciation remains unchanged between revaluation model or cost model. Under cost model depreciation is calculated on the basis of cost less residual value over the useful life of asset. Under revaluation model depreciation is calculated on the basis of revalued amount less residual value over the remaining useful life. Under both models depreciation for the period is charged in profit or loss account.
However, there is one additional step that entity may take while calculating depreciation of asset with revaluation surplus. Entity may make transfers from revaluation surplus to retained earnings equal to excess depreciation at the end of every period.
Excess depreciation is simply the difference between the depreciation charge calculated on revalued amount less depreciation charge calculated on historical cost of asset. In other words, excess depreciation is the additional depreciation that entity would have not charged had the asset being measured on historical cost basis.
Two important concepts to emphasize are:
- Transfer of reserve from revaluation surplus to retained earnings is optional and entity may choose not to make the transfers.
- Excess depreciation arises only if there is revaluation surplus.
1 Accounting for depreciation of revalued asset with surplus
Journal entry to record the depreciation charge on revalued asset is following:
| Profit or loss a/c | ### | |
| Accumulated depreciation a/c | ### |
The amount of reserve transfer or excess depreciation is calculated as:
Excess depreciation = Depreciation on revalued amount – Depreciation on original cost
Journal entry to record the transfer of reserve from revaluation surplus to retained earnings account using the amount calculated as excess depreciation is following:
| Revaluation surplus a/c | ### | |
| Retained earnings a/c | ### |
Transfer as a result of excess depreciation is made directly to retained earnings and NOT credited to income statement or other comprehensive income statement rather it is recorded in statement of changes in equity.
Example: Depreciation calculation for revalued asset
Entity has a building that is revalued to 195,000 during the year. Original cost of the building was 100,000 with estimated useful life of 20 years. Entity depreciates the building on straight-line basis. Revaluation took place five years after acquisition. Remaining useful life of asset was unchanged.
Calculate:
- Revaluation surplus amount
- Depreciation charge for the period
- Excess depreciation to be transferred
Solution:
Revaluation surplus amount
To calculate this we need to know the carrying amount of asset at the time of revaluation which is cost less accumulated depreciation of five years. Depreciation for five years is:
= 100,000 / 20 = 5,000 x 5 = 25,000
Carrying amount is therefore 75,000 (100,000 – 25,000)
As asset was revalued to 195,000, therefore, the revaluation surplus amount is 120,000 (195,000 – 75,000)
Depreciation charge for the period
Divide the revalued amount over the remaining useful life to get depreciation charge for the year:
= 195,000 / 15 = $13,000
Excess depreciation
Excess depreciation is difference between depreciation as per revalued amount and depreciation as per original cost of the asset. We have calculated the depreciation charge under both modes above:
Depreciation on revalued amount = 13,000
Depreciation on original cost = 5,000
The difference is 8,000 (13,000 – 5,000) and this amount will be transferred from revaluation surplus to retained earnings account if entity chose to do so. The journal entry will be:
| Revaluation surplus a/c | 8,000 | |
| Retained earnings a/c | 8,000 |