Definition and explanation
Under revaluation method a competent person values the asset concerned 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. Adjustments are however made if there are any additions to or sales of the asset made during the year.
A hotel bought some crockery on January 1, 2015 for $1,500. On December 31, 2016, it was valued by a chef at $1,250. During the year 2016, the hotel bought some more crockery items for $2,000 and at the end of that year, the stock of crockery was valued at $2,850.
Required: Calculate the amount of depreciation to be charged for the year 2015 and 2016.
Depreciation for 2015 = Book value on January 1, 2015 – Value placed on December 31, 2015
= $1,500 – $1,250
Depreciation for 2016 = Book value on January 1, 2016 + Purchases during the year – Value placed on December 31, 2016
= $1,250 + 2,000 – $2,850
Let us continue with the previous example and assume that in 2017, the hotel bought more crockery for $2,400 and also sold some of the worn out crockery items for $400. At the end of the year, the total stock of crockery was valued at $4,050.
Required: Compute the depreciation expense for the year 2017.
Depreciation for 2017 = (Value on Jan. 01, 2017 + Crockery purchased during the year – Crockery sold during the year) – Value placed on December 31, 2017.
= ($2,850 + $2,400 – $400) – $4,050
Revaluation method is particularly suitable for such assets that are small in value, have greater degree of breakage, and are usually comprised of various items grouped under one fixed asset account. Examples of such assets are loose tools, crockery and cutlery, books, smaller office machines, smaller tools, etc.