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Finance & Accounting
Pages 4 (1004 words)
Presentation notes Answer a). Revaluation method and cost method are applied to record the value of assets at the end of accounting period. In revaluation method the assets are valued at the end of each period and the difference between the old value and the new value is considered to be the actual depreciation to be charged against the profit and loss account.
In the cost method, depreciation is charged in the income statement against income as an expense, and the value of the asset after deducting depreciation is carried to the balance sheet. In the revaluation method, any increase in future value of the asset, is recorded in the balance sheet and is recognized directly in equity under the head revaluation surplus. If the future value of an asset decreases then the decrease is recorded in the income statement as an expense item. Accounting for the revaluation method is beneficial if the future value of the assets increase since the inclusion of revaluation surplus will increase revaluation reserve, which will increase the value of equity of a company. But if the future value is on the verge of decrease it is better to consider the cost method instead of the revaluation method for the purpose valuation of assets on a long-term basis. The reason to this can be explained with the help of a small example given below- Question: A building was purchased by a company on 1st January 2009 at a cost of $100million. The company estimates the life-time of the asset to be 50years, and thus the asset is to be depreciated over 50years. The company decides to use the revaluation for determining the value of the buildings at the end of 2015. ...
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