Silic accounting exercise - Silic accounting under...

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Silic ac ounting under dif erent alternatives. If Silic had always used historical cost ac ounting without the fair value re-measurement, they would depreciate the historical cost of the buildings each year, over the estimated useful lives of the buildings. We can roughly gues Silic's estimated useful life by taking statement (€30,323): Estimated useful life = 25.44 years In 20 3, Silic bought more buildings, so its buildings ac ount increased to €816,108. 20 3 depreciation expense would be recorded as usual under historical cost ac ounting: 12/31/20 3 Charge to depreciation € 32,078 Depreciation and provisions € 32,078 €816,108 / 25.44 years = €32,078. The buildings' fair values are obviously larger than cost, so no impairments ne d be recorded. (Here, we're using Exhibits 4 and 5 with the re-measurement, starting in row 91 below.) The remeasurement, as covered in clas , was (source: Silic's fo tnotes to 20 3 f/s): 1/1/20 3 Land (valuation) € 2 0,0 0 Buildings (valuation) € 349,0 0 Tax liability (part of 'Other creditors') € 9 ,0 0 Revaluation surplus € 470,0 0 Silic stil uses historical cost ac ounting for its buildings. For 20 3, Silic stil had acquired the ad itional buildings, so its depreciable basis should be about (estimated): €816,108 + €349,0 0 = €1,165,108. Silic would then record depreciation using this €1,165,108 balance and its estimated useful life. Using our gues of the useful life, we would gues the entry should be: 12/31/20 3 Charge to depreciation € 45,795 Depreciation and provisions € 45,795 We're a bit of (to much depreciation) from Silic's actual reported depreciation expense of €42,796; likely because their average estimated useful life is dif erent in 20 3 than in 20 2. But, our estimate is suf icient to il ustrate how the ac ounting works. Now, Silic matches the increased depreciation expense to the unrealized gain from the re-measurement. The unrealized gain in the building, €349,0 0, is amortized over the same estimated useful life as used for depreciation expense. The entry is: 12/31/20 3 Revaluation surplus € 13,718 Retained earnings € 13,718 €349,0 0 / 25.44 years = €13,718. So, the revaluation reserve decreases by this amortization and retained earnings increases, of set ing the retained earnings decrease from higher depreciation expense from including the revaluation to compute depreciation. The net depreciation expense included in retained earnings in 20 3 is €45,795 - €13,718 = €32,07 which is the depreciation expense under pure historical cost ac ounting we computed above. Silic continues to depreciate the revalued buildings' re-measured cost and amortizes the revaluation surplus over the useful lives of the buildings (or until buildings are sold). When Silic sel s a building, its remaining portion of the revaluation surplus is transfer ed to income as part of the gain or los on sale of the building. 1) Silic sel s a building at the end of 20 3.
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