Definition and Explanation
Under the revaluation method, a competent person values the company’s assets at the end of each financial year and the depreciation is calculated by deducting the value at the end of the year from the value at the beginning of the year.
However, adjustments are made if there are any additions to or sales of the assets made during the year.
The revaluation method is especially suitable for calculating depreciation on the following assets:
- Assets that are small in value
- Assets prone to breakage
These assets are usually assorted and grouped under one fixed asset account. Examples of such assets include loose tools, crockery, cutlery, books, small office machines, small tools, and so on.
A hotel purchased crockery on 1 January 2015 for $1,500. On 31 December 2016, it was valued by a chef at $1,250. In 2016, the hotel purchased more crockery items for $2,000. At the end of the year, the stock of crockery was valued at $2,850.
Required: Calculate the amount of depreciation to be charged for 2015 and 2016.
Depreciation for 2015 = Book value on 1 January 2015 – Value placed on 31 December 2015
= $1,500 – $1,250
Depreciation for 2016 = Book value on 1 January 2016 + Purchases during the year – Value placed on 31 December 2016
= $1,250 + 2,000 – $2,850
Continuing with the hotel from Example 1, let’s suppose that in 2017, the hotel purchased more crockery for $2,400 and sold some worn-out crockery items for $400. At year-end, the total stock of crockery was valued at $4,050.
Required: Compute the depreciation expense for 2017.
Depreciation for 2017 = (Value on 1 January 2017 + Crockery purchased during the year – Crockery sold during the year) – Value placed on 31 December 2017.
= ($2,850 + $2,400 – $400) – $4,050
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