all right excellent we are doing really
great and it’s time for another practical exercise that will reinforce
what we’ve learned here let’s solve it together this time shall we
company X acquired a tangible asset for \$25,000 at the beginning of 2017 the
tangible asset has a 5-year useful life precisely two years later in 2019 the
asset was revalued at \$12,500 and it’s expected useful life remained the same
then a year later the asset was revalued to \$12,000 and it’s expected useful life
remained the same here’s our task how are we going to account for the assets
revaluation and what is going to be the difference in the way we account for its
depreciation the first thing we need to do is calculate the carrying value of
the asset its original cost was \$25,000 and its useful life is five years which
means that the asset will be amortized \$5,000 per year after two years the
carrying value of the asset would be equal to 15,000 dollars as a
depreciation of \$10,000 would be accumulated the \$15,000 carrying value
is greater than the \$12,500 fair value we have so this will be a downward
revaluation of \$2,500 however before we continue further we
need to clear up accumulated depreciation the way to do that is by
debiting accumulated depreciation for \$10,000 and crediting the asset for
\$10,000 this doesn’t make any changes to the balance sheet right let’s report the
effects of our revaluation we’ll have to debit revaluation loss \$2,500 and credit
the tangible asset for 2005 hundred dollars okay now we just need to
adjust the assets depreciation expense it is now worth twelve thousand five
hundred dollars and has three more years of useful life therefore will depreciate
it by four thousand one hundred sixty six dollars annually
hence the next years asset carrying value will be eight thousand three
hundred thirty-four dollars however a new revaluation takes place and the
asset is now revalued at twelve thousand dollars this is an upward revaluation
correct okay previously we registered a revaluation loss of two thousand five
hundred dollars such a loss according to the principles of conservative
accounting goes to P&L instead when an asset is revalued upwards things are a
bit more complicated if no revaluation loss has been registered previously we
have to report the upward valuation in other comprehensive income which is an
equity account in its entirety it doesn’t show up in the P&L statement if
on the other hand we’ve already registered a revaluation loss which is
the case in this exercise we can compensate for such loss reporting a
revaluation income of two thousand five hundred dollars in the P&L in our case
the upward revaluation is more than two thousand five hundred dollars which
means that a part of it will be reported in the P&L and the rest of it will go
directly to other comprehensive income to be precise \$2,500 we’ll go to P&L and
one thousand one hundred sixty six dollars will go to OCI
makes sense right before we make any revaluation entries let’s clear out
depreciation we have one year of depreciation for four thousand one
hundred sixty six dollars I’ll debit accumulated depreciation for
thousand \$166 and will credit tangible assets for the same amount the
accounting transaction for the revaluation taking place in 2020 will be
debit the tangible asset for three thousand six hundred sixty six dollars
and credit revaluation gained for \$2,500 this line goes into P&L and credit
revaluation surplus for one thousand one hundred sixty six dollars which goes to
other comprehensive income as you can see once we reversed the loss sustained
through downward revaluation previously we continue to send upward revaluation
in OCI this pretty much wraps up our exercise that’s how we account for
revaluation thanks for watching