Definition of Backlog Depreciation
Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. But, the revaluation also gives rise to a backlog depreciation. This backlog depreciation should be charged to Revaluation Reserve Account. The concept of backlog depreciation can be followed by the help of the below illustration.
Formula to calculate Backlog depreciation
Backlog Depreciation = Difference in depreciation – Depreciation changeable in current year
Compute the backlog depreciation from the information given below:
A machine was purchased on 1.1.2013 at a cost of $12,00,000 and its useful life was estimated to be 10 years. Its replacement cost was $20,00,000 on 1.1.2018 and $22,00,000 on 31,.12,2018. Calculate the amount of backlog depreciation.
Replacement cost of the machine on 1.1.2018 (Current value) = $20,00,000
Expired life on 1.1.2018 = 5 years
Depreciation under CCA = (20,00,000 x 5) / 10 = $1,00,000
Replacement/Current value on 31.12.2018 = $22,00,000
Expired life on 31.12.2018 = 6 years
Depreciation under CCA = (22,00,000 x 6) / 10 = $13,20,000
Difference in Depreciation = 13,20,000 – 10,00,000 = $3,20,000
Current year’s depreciation = (20,00,000 + 22,00,000) / (2×10) = $2,10,000
Backlog depreciation = Difference in depreciation – depreciation changeable in current year
= 3,20,000 – 2,10,000