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Question about revaluation of long term assets
For this question as:
On January 1, 2002, Facey Inc. purchased
manufacturing equipment for a total cost of $10 million. The useful
life of the equipment at the time of the purchase was 10 years with no
salvage value. Four years later on January 1, 2006, Facey elected under
IAS 16 to revalue the equipment to more accurately reflect its value.
The revaluation amended the equipment value as at January 1, 2006 to
$3.6 million and the remaining useful life at that time was 6 years
with no salvage value. Facey uses the straight-line method of
depreciation. As a result of all the effects of the revaluation, what is the decrease in Facey's net income from 2005 to 2006?
A . $2,400,000.
B . $4,000,000.
C . $6,000,000.
D . $2,000,000.
The answer is as:
D .
Annual
depreciation for 2002 to 2005: $10,000,000 / 10 = $1,000,000
Net book value at January 1, 2006 immediately before the revaluation
would be $10,000,000 ?(4 x $1,000,000) = $6,000,000 Upon revaluation on
January 1, 2006, the decrease to $3,600,000 is a negative revaluation
that decreases assets and equity by $2,400,000 and that amount must be
recorded on the income statement. This reduces net income by
$2,400,000. Annual depreciation for 2006 onwards is revised to
$3,600,000 / 6 = $600,000, a $400,000 decrease from 2005. The
combination of a decrease in net income of $2,400,000 and an increase
in net income of $400,000 leads to a total decrease in net income of
$2,000,000 in 2006.
My questions are:
1) we don't have to consider the revaluation of long-term assets as accoutning principle change, right?
2) for this question, the write-off of $2.4 million should be included in the income statement of 2006, right?
3) I don't understand why we still have to consider the 2006 depreciation expenses' effect for previous years, and deduct teh $400,000 from the $2.4million. Is 2006 a new financial year and should we just consider the depreciation of 2006 is not connected with before?
Thank you for your time and attention,
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发表于 2007-11-12 08:33
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