Calculate the annual charge for depreciation for the first five years of the building's life and the statement of financial position value of the land and building as at the end of each of the first five years. Demonstrate the impact the revaluation will have on the depreciation charge and the statement of financial position value of the land and building.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Maxim Sdn Bhd commenced business as kitchenware manufacturing on 1 January 2013. For the purpose of depreciation, Maxim Sdn Bhd decided the following.
-
Acquisition of a piece of land worth $2,000,000 would not be
depreciated . -
Factory building worth $300,000 would be depreciated by the
straight line method to a nil residual value over 30 years.
On 1 January 2018, the board of directors decided to revalue its assets after consulted property valuers as following:-
Land - $2,500,000
Factory building - $450,000
The factory building is estimated still has further 25 years useful life remaining.
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Calculate the annual charge for depreciation for the first five years of the building's life and the statement of financial position value of the land and building as at the end of each of the first five years.
-
Demonstrate the impact the revaluation will have on the depreciation charge and the statement of financial position value of the land and building.
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