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CPA Cost and Revaluation Models - YouTube
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is 16 paragraph 29 allows a choice of
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two methods for measuring assets the
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cost model and the devaluation model
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let's start with the cost model the
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carrying amount of an asset under the
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cost model would be calculated as costs
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less accumulated depreciation and
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impairment for example at the beginning
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of the year Alex a professional Baker
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purchased a new oven at a cost of $4,000
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the oven is depreciated over eight years
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on a straight-line basis and it has $800
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residual value in year five the oven had
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revalued amount of $3,000 if Alex uses
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the cost model what is the journal entry
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for the recognition of depreciation each
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year and what will be the carrying
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amount of the oven at the end of year 5
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depreciation is calculated by dividing
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cost minus the residual value over the
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assets useful life 4000 dollars cost
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less $800 residual value equals $3,200
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this divided by the eight-year useful
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life equals an annual depreciation of
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$400 every year the journal entry would
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be to debit depreciation expense in
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profit and loss and credit accumulated
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depreciation which is the contra asset
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the carrying amount of the oven over the
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eight-year period would decrease by 400
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dollars every year remember at the end
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of eight years the oven would not
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decrease to zero but rather to its
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residual value of $800 the oven had a
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revalued amount of $3,000 in year five
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however Alex uses the cost model and so
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the oven does not get adjusted by this
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revaluation $2,000 will be the carrying
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amount at the end of year five we can
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also use the carrying amount formula to
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calculate this we know that the cost is
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four thousand dollars accumulated
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depreciation would be calculated as the
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annual depreciation multiplied by five
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years which is two thousand dollars
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there was no in payment
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indicated $2,000 is the carrying amount
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now let's look at the revaluation model
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the carrying amount under the
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revaluation model is calculated as the
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fair value minus subsequent accumulated
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depreciation and subsequent impairment
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losses in terms of IAS 16 paragraph 39
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if the revaluation results in an
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increase in the carrying amount of an
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asset the gain should be recognized in
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other comprehensive income is 16
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paragraph 40 states that if there is a
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decrease in the carrying amount due to
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your evaluation adjustment the loss must
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be recognized in profit and loss if alex
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uses the revaluation model what is the
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journal entry to record the revaluation
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in year 5 the carrying amount in your
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father is $2,000 to get to the $3,000
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revalued amount there is an increase of
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$1000 the journal entry is to debit
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assets with $1000 and credit revaluation
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surplus which is a gain through other
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comprehensive income RS 16 paragraph 39
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and 40 also contain exceptions to the
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general rule prior to recognizing again
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in other comprehensive income the entity
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has to consider if there was a loss
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recognized in prior years the gain
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should then be allocated to profit and
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loss to the extent that it reverses
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these losses before it can recognize the
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remainder in other comprehensive income
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so when there is a revaluation gain you
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first need to consider if there were any
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revaluation losses that were recognized
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in prior years if there were then the
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exception applies which requires you to
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first recognize the gain in profit and
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loss until the previous losses were
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reversed and then she recognized the
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remainder in other comprehensive income
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similarly before loss is recognized in
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profit and loss the entity has to
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consider if there was previously a gain
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recognized the loss should then first be
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allocated to other comprehensive income
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to the extent that it reverses the prior
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year game before the remainder of the
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loss can be recognized in profit
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los when there is a revaluation loss you
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first need to consider if there were any
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revaluation gains that were recognized
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in the prior years if they were then the
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exception applies which requires you to
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first recognize the loss in other
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comprehensive income until the previous
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gains have been reversed and then G
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recognize the remainder in profit and
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loss at the end of year six the fair
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value of the oven decreased to 950
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dollars what will be the depreciation in
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year six and what will be the journal
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entry to record the revaluation at the
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end of year six depreciation is
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calculated by dividing the fair value
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minus the residual value over that
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assets remaining useful life
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note that the fair value or the new
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carrying amount could be used but not
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cost as this was not the first time
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depreciation has been calculated for
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this asset $3,000 free valued less $800
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residual value equals $2,200 this is
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divided by the three year remaining
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useful life eight years of totaled
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useful life minus five years that passed
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seven hundred and thirty three dollars
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rounded off is the new depreciation in
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year six the carrying amount of the oven
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at the end of year six is two thousand
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two hundred and sixty seven dollars
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calculated as the revalued amount minus
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depreciation of seven hundred and thirty
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three dollars but the fair value of the
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oven decreased to nine hundred and fifty
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dollars that is a loss of one thousand
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three hundred and seventeen dollars I
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sixteen requires the loss to be
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recognized to the profit and loss
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however the exception to this rule is to
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first recognize the loss through other
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comprehensive income to the extent that
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it reverses Praia gains that were
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recorded for the asset a prior year gain
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of one thousand dollars was recognized
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through other comprehensive income so
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the journal entry would be to first
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debit revaluation surplus in other
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comprehensive income with one thousand
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dollars does the thin S
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reversing the gain that was recognized
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in year five the remainder then gets
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debited as an expense through profit and
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loss the asset is credited with the
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total decrease one thousand three
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hundred and seventeen dollars to
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summarize is 16 allows a choice between
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the cost model and the revaluation model
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each model has different rules and thus
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the same asset may be accounted for
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differently depending on the model
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selected by the entity
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