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Level 3 Manual - Revaluation Reserve help!

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  • # 71821

Hi

Am about to sit my Level 3 Manual (eeek) and am slightly unnerved by the fact that revaluation has appeared in 2 different mock papers.  What's really getting to me is that revaluation is not covered in my course materials!!

Could someone please provide guidance on how I would account for a revaluation in terms of double entry.

Going purely on guess work:

Dr Fixed Asset with additional value
Cr Revaluation with same value

Dr Accumulated Depreciation (to bring to zero)
Cr Revaluation Reserve

The end result is that the Fixed Asset shows the new valuation with zero depreciation and the revaluation reserve is comprised of the additional value + accumulated depreciation to date.

Is this even remotely correct?  I'm hoping this makes sense to someone out there!

Grateful for any assistance

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  • # 71862

Hi
You are partly right.

You would Debit Fixed Assets in the balance sheet with the amount of the increase and credit  Capital Reserve: Revaluation Reserve.

You would leave the accumulated depreciation where it is.  However, in the year of revaluation and subsequent years you would continue to depreciate using the same method as used in previous years, but the increased amount of depreciation i.e the difference would be debited to the Revaluation Reserve and not the P&L. For example if depreciation is on a straight line basis and on the old value was say £2000 per annum. On the revised value the depreciation is £2300 then the £300 is the amount posted to Revaluation reserves and not the P&L. Obviously the £2300 would be posted as a credit to the balance sheet depreciation account and £2000 debit to depreciation in the P&L .

Hope that helps.  Good luck with your exam.

Regards

Lynne

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  • # 71868

Wow Lynne - fantastic explanation!  I too am studying for Level 111 and you don't know how much your explanation helps me understand revaluations's - thanks for this.

Kind regards

Lynda 

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  • # 71873

Hi all

I'm sorry Lynne I don't think your explanation is correct.  I have never posted accumulating depreciation to a capital reserve account.  ( I hope I've understood yo correctly). I think the revaluation reserve should reflect the increase from NBV to the new market value and then should remain as a reserve, its part of capital and doesn't depreciate. The new cost however does depreciate over the remaining life of the asset.  Obviously this is something that doesn't crop up that often so before I start talking rubbish I will check up and go and find a worked exam type example -I'm sure this is covered in detail in the Level IV syllabus so there may be an example in that text book.  I will have to leave this until I have a little more time later tomorrow so will post here again later if that's ok.



 

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  • # 71885

Hi Lynne

Thank you for your response it has helped clarify somewhat.  As the topic is not covered in my course materials, do you have a recommendation as to where I can find out more?  I think it's now the depreciation aspect that's got me slightly muddled.

Per annepebo's response, am I correct in thinking that revaluation is more a Level IV area (even though it appears in the mocks)?

Apologies, I'm one of those people who likes to understand the logic as well as the process - a bit of a perfectionist!

Many thanks again for your help and here's to hoping it's not a major item in the exam. 

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  • # 71886

Hi Infinite

I would have thought it's more level IV but if its in the mocks for level III then so be it.  Strange that its not covered in your course material though. 

It's a while since I studied this although I have accounted for revaluations a number times in real-life. I am aware though that setting it out as the examiners would prefer is imprtant here so I had a quick look this morning and there is a few examples in the level IV text.  When I get home this evening I will attempt to summarise it as an example for you, just not got the time today to concentrate on it.

If someone else would prefer to post in the meantime feel free !!!

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  • # 71889

Hi Anne

Thank you.  If it's not too much trouble I'd be hugely grateful for any example specifically in terms of how the depreciation element is handled - that's where I'm slightly confused.

In the meantime, I'll try and research the topic a little further on the internet and see how I go.

Thanks again for your help

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  • # 71894

hi

Just trying to help out a student. Apologies if you think I am wrong, clearly the experienced accountant that I asked doesn't know what she is doing. Although I thought her explanation was logical and made sense.

Apologies for misleading anyone.

Regards

Lynne



Edited at 08 Jun 2011 10:55 AM GMT

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  • # 71902

MORE ON THE REVALUATION RESERVE


Very often the revaluation reserve can relate to an asset which has not been depreciated eg a freehold property which has increased value due to market forces. In this instance the
write up (revaluation) of the freehold property is an unrealized profit because the property has not been sold. As such, this unrealized profit is not available for distribution (which would be in the form of drawings for a sole trader and dividends for the Shareholders of a Limited Company).

 

Therefore, the unrealized profit is allocated directly to the balance sheet ie bypassing the income statement (profit and loss account).

 

 Regarding the balance sheet presentation, on the assets side of the balance sheet the property is shown at its new written up market value in the fixed assets section. The revaluation (unrealized) profit is shown as a Revaluation Reserve on the Long Term liabilities part of the balance sheet. Double entry is to debit the asset (property) account with the revaluation amount and credit a freehold property revaluation reserve.

 

Revaluations of  freehold property are fairly common especially in a rising property market when property prices are rising. In these circumstances, Business with large property portfolios may be keen to enhance ‘both sides’ of the balance sheet.

 

Of course in the event of the cessation of the Business, all of its assets (including the revalued property) would be sold at their market value and the creditors paid off, in order of preference, from the sale proceeds. The residue (if any) would be distributed to the Business Owners/Shareholders.

 

Best wishes

Brian

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  • # 71903

Lynne said:

“hi

Just trying to help out a student. Apologies if you think I am wrong, clearly the experienced accountant that I asked doesn't know what she is doing. Although I thought her explanation was logical and made sense.

Apologies for misleading anyone.

Regards

Lynne



Edited at 08 Jun 2011 10:55 AM GMT


Hi Lynne

I think I should be the one to apologise.  Your explanation was pretty clear, however, as revaluation isn't in my course materials I'm suffering a little from trying to piece it together in my head rather than having an example to follow.

Having said that, it's slowly starting to make more sense now.
 
Thank you to everyone for your help 

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  • # 71907

Hi All

Lynne you were correct Anne I am afraid you do seem to have misunderstood things from my understanding.

If you have an Asset of building with a cost of £100,000.00 and accumlated depreciation on buildings of say £50,000.00  depreciation being at 5% SL over the last 10 years and the building is now valued at say £145,000.00.

You would (As I understand it)

DR Buildings with                   £95,000.00
CR Revaluation reserve with £95,000.00

This now gives the Netbook value of the asset as £145,000.00 (195000.00 Less 50000.00 Accum Dep'n)

Now for the Dep'n

DR Dep'n P&L                    £9,750.00
CR Accum Dep'n buildings £9,750.00

Now for the bit that Lynne short-cutted to.

DR Revaluation reserve  £4,750.00
CR Profit & Loss reserve £4,750.00

the adjustment between the reserves needs to be posted as you should write down the revaluation reserve in line with the write down of the revaluation element of the asset.

You can see that in Lynnes explanation she has simply short cut the movement between the reserves.

I hope this makes sense.

Kind regards
Stuart

Edited at 08 Jun 2011 12:51 PM GMT

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  • # 71918

Stuart/Lynne

Thank you both so much.  It now all makes perfect sense!

Apologies if I've created 'issues' in the forum through my own panic about revaluation.  I'm now [sort of] looking forward to taking the exam.

Best wishes to you both 

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  • # 71923

Infinite said:

“Stuart/Lynne

Thank you both so much.  It now all makes perfect sense!

Apologies if I've created 'issues' in the forum through my own panic about revaluation.  I'm now [sort of] looking forward to taking the exam.

Best wishes to you both ”

Hi Infinite

You have no reason to apologise. You asked a question and we responded.  That's what the forum is about, helping people with queries and communicating.

Good luck with the exam.  Have confidence in yourself.Smile

Regards

Lynne

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