A company which uses the revaluation model for its PPE bought a building on 1 January 2014 for £50m. The building has an estimated useful life of 50 years and nil residual value. On 31 December 2018, the building was revalued at £40.5m and on 31 December 2020 it was revalued for a second time at £39m. The company uses the straight-line method of depreciation for all PPE items. There was no change to the remaining useful life after each revaluation. What is the net effect of both revaluations on the statement of comprehensive income?

The net effect of both revaluations on the statement of comprehensive income is a net revaluation loss of £4.20m that will reduce the comprehensive income by the exact amount of £4.20m.

Step-by-step explanation:

This can be determined using the following 3 steps:

Step 1: Calculation of the effect of first revaluation: from 01 January 2014 to 31 December 2018

Building cost = £50

Number of useful life = 50

Revalued amount on 31 December 2018 = £40.5m

Annual depreciation expenses from 01 January 2014 to 31 December 2018 = Building cost / Number of useful life = £50m / 50 = £1m

Number of years from 01 January 2014 to 31 December 2018 = 5

Total depreciation expenses from 01 January 2014 to 31 December 2018 = Annual depreciation expenses from 01 January 2014 to 31 December 2018 * Number of years from 01 January 2014 to 31 December 2018 = £1m * 5 = £5m

Net book value on 31 December 2018 = Building cost - Total depreciation expenses from 01 January 2014 to 31 December 2018 = £50m - £5m = £45m

Revaluation loss from the first revaluation = Net book value on 31 December 2018 - Revalued amount on 31 December 2018 = £45m - £40.5m = £4.50m

Step 2: Calculation of the effect of second revaluation: from 01 January 2019 to 31 December 2020

Revalued amount on 31 December 2020 = £39m

Number of useful life remaining after 31 December 2018 = Number of useful life - Number of years from 01 January 2014 to 31 December 2018 = 50 - 5 = 45

Annual depreciation expenses from 01 January 2019 to 31 December 2020 = Revalued amount on 31 December 2018 / Number of useful life remaining after 31 December 2018 = £40.5m / 5 = £0.90

Number of years from 01 January 2019 to 31 December 2020 = 2

Total depreciation expenses from 01 January 2019 to 31 December 2020 = Annual depreciation expenses from 01 January 2019 to 31 December 2020 * Number of years from 01 January 2019 to 31 December 2020 = £0.90 * 2 = £1.80

Net book value on 31 December 2020 = Revalued amount on 31 December 2018 - Total depreciation expenses from 01 January 2019 to 31 December 2020 = £40.5m - £1.80 = £38.70m

Revaluation surplus from the second revaluation = Revalued amount on 31 December 2020 – Net book value on 31 December 2020 = £39m - £38.70 = £0.30m

Step 3: Calculation of the net effect of both revaluations on the statement of comprehensive income

Net revaluation loss = Revaluation loss from the first revaluation - Revaluation surplus from the second revaluation = £4.50m - £0.30m = £4.20m

Therefore, the net effect of both revaluations on the statement of comprehensive income is a net revaluation loss of £4.20m that will reduce the comprehensive income by the exact amount of £4.20m.

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step-by-step explanation: