PSA8.4 I understand parts (a) and (b) of this question but do not understand the
ID: 2409997 • Letter: P
Question
PSA8.4
I understand parts (a) and (b) of this question but do not understand the suggested journal entry answer in part (c). The journal entry answer is as follows:
1/7/16 Accumulated Depreciation - Building 12500
Revaluation Expense 50000
Building 62500
Why is accumulated depreciation utilized within the revaluation journal entry?
On 1 July 2015, Jupiter Ltd purchased land for $400 000 and buildings for $250 000. The estimated useful life of the buildings was 20 years, with a residual value of nil. On 1 October 2015, machinery was purchased at a total cost of
$120 000. The estimated useful life of the machinery was 4 years with an estimated residual value of $9000. Jupiter Ltd uses straight-line depreciation for buildings and the diminishing-balance method for machinery. The entity’s reporting period ends 30 June.
(a) Prepare journal entries to record the purchase of the land, buildings and machinery during the year.
(b) Prepare journal entries to record the depreciation expense for the year ended 30 June 2016.
(c) Assume that on 1 July 2016 the entity revalued the land upwards by $80 000 and the buildings downwards by $50 000. Prepare the journal entries for the revaluations.
Explanation / Answer
The depreciation expense for building every year is $250000/20 years=$12500.
When the revaluation entry is recorded , the following formula is used:
Revalued amount of asset=Fair value of the asset-Accumulated Depreciation
Thus, to deduct the depreciation of$12500 from the upward total valauation of $80000, a debit to depreciation has been recorded. Net addition to building is $80000-$12500=$62500.
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