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Continuation on PPE

Continuation on PPE. Depreciated Replacement Cost. This method of valuation is used when there is no fair value mkt measurement available and hence FV has to be estimated Let say, Co A bought a PPE for a price of 580K in year 1/1/2004. The useful life of the asset was 10 years.

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Continuation on PPE

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  1. Continuation on PPE

  2. Depreciated Replacement Cost This method of valuation is used when there is no fair value mkt measurement available and hence FV has to be estimated Let say, Co A bought a PPE for a price of 580K in year 1/1/2004. The useful life of the asset was 10 years. In year 1/1/2008 the asset revalued upward using depreciated replacement cost method. The value of the same new PPE at the date of revaluation was RM1000K

  3. Continue…. In Year 2008 (1 Jan) RM’000 Replacement Cost of new PPE 1000 Less: Accumulated depreciation (400) [(1000/10 yrs) x 4 yrs] Depreciated replacement cost 600 In year 2008 CA based on initial cost 580 K – [(580/10yrs) x 4yrs] = 348K Revaluation Surplus = 600K-348K =252K

  4. Method (a) Dr PPE 420K (1000-580) Cr Accumulated Dep 168K (420/10yrs )X 4 yrs Cr Revaluation Reserve 252K Method (b) Dr Accumulated Dep 232 [(580/10) x 4 yrs] Dr PPE (600K-580K) 20 Cr Revaluation Reserve 252

  5. Illustration 1 On 1 Jan 20x5, a machinery (RM100,000) was bought and used. The machine has 10 years useful life and depreciated on a straight-line basis. Depreciation is RM10,000 per year. After 3 years, the market price has increased to RM200,000

  6. 20x5 20x8 At At acquired cost revalued Difference (RM’000) (RM’000) (RM’000) Gross carrying Amount 100 200 100 Accumulated Depreciation (end of year 3) 30 60 30 Net book/ revalued value 70 Depreciated Replacement Cost 140 70 (surplus)

  7. Presentation Para 35(a) Para 35(b) Cost 200K (100K+100k) 140K Less: Acc dep -60K (30K+30K) - (eliminate) CA 140K 140K

  8. Method (a)—Para 35 (a) 20x8 Dr Machinery (200-100) RM100,000 Cr Acc. Depreciation (60k-30K) RM30,000 Cr Revaluation reserve (140-70k) RM70,000 Method (b)– Para 35 (b) 20x8 Dr. Acc. Depreciation RM30,000 Dr. Machinery (140-100) RM40,000 Cr Revaluation reserve (140-70) RM70,000 ** the new gross carrying amount (140,000) will continue the depreciation based on the useful life of 7 years.

  9. Presentation in the Financial Statement Method (a) (b) RM’000 RM’000 Machinery, at 200 140 Valuation Less: Acc. Depre. (60) ----- Total 140 140 Useful life 10 7 for annual dep (year) * Depreciation per year = RM20,000

  10. Illustration 2 Using the data from illustration 1 and the entity adopts method (b). 2 years after the revaluation date, the machinery was disposed for RM110,000 Depreciation Depreciation Difference at cost at revaluation (surplus) 20x8 10,000 20,000 10,000 20x9 10,000 20,000 10,000 Total 40,000 20,000

  11. Journal entry 20x8 Dr Depreciation expense 20,000 Cr Accumulated dep. 20,000 (140K/7 yrs or 200K/10yrs) Dr Revaluation of PPE 10,000 Cr Retained profit 10,000 (70K/7yrs) 20x10 Dr Bank 110,000 Dr Accumulated dep. 40,000 (20k x 2yrs) Cr Machinery (Dep Rep Cost) 140,000 Cr Gain on disposal [110 – 100(CA)] 10,000 Dr Revaluation reserve (70 -20) 50,000 Cr Retained profit 50,000 140K-40K Sellg Price

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