Backlog Depreciation: Definition
Whenever an asset is revalued, the profit on revaluation is transferred to the revaluation reserve account. However, the revaluation also gives rise to backlog depreciation.
This backlog depreciation should be charged to the revaluation reserve account. The concept of backlog depreciation is illustrated in the next section.
Formula to Calculate Backlog Depreciation
Backlog depreciation = Difference in depreciation – Depreciation chargeable in current year
Example
Compute the backlog depreciation using the information given below:
- A machine was purchased on 1 January 2013 at a cost of $12,000,000
- The machine’s useful life is estimated at 10 years
- The machine’s replacement cost was $20,000,000 on 1 January 2018 and $22,000,000 on 31 December 2018
Solution
Replacement cost of the machine on 1/1/2018 (Current value) = $20,000,000
Expired life on 1 January 2018 = 5 years
Depreciation under CCA = (20,000,000 x 5) / 10 = $1,000,000
Replacement/Current value on 12/31/2018 = $22,000,000
Expired life on 31 December 2018 = 6 years
Depreciation under CCA = (22,000,000 x 6) / 10 = $13,200,000
Difference in Depreciation = 13,200,000 – 10,000,000 = $3,200,000
Current year’s depreciation = (20,000,000 + 22,000,000) / (2 x 10) = $2,100,000
Backlog depreciation = Difference in depreciation – depreciation chargeable in current year
= 3,200,000 – 2,100,000
= $1,100,000