From 2011 and 2015 the building was accounted for an investment property because it was used
to earn rental income. However in January 2016 the building was used in the production and
supply of its goods. Since the usage of the building has changed, the building must be reclassified
from an investment property to owner occupied property (PPE) which is governed under MFRS
116.
UDE2002/CH3/T3 amiroh
Journal Entries
DEBIT CREDIT
1.1.2011
DR IP
CR BANK
800,000
800,000
1.1.2012
DR IP
CR FV GAIN ON IP
150,000
150,000
1.1.2013 No CHANGES in value of the asset
Amount of asset remain same as 950,000
1.1.2014
DR IP
CR FV GAIN ON IP
50,000
50,000
1.1.2015 No CHANGES in value of the asset
Amount of asset remain same as
1,000,000
1.1.2016
DR IP
CR FV GAIN ON IP
500,000
500,000
Year 2016 IP – PPE
DR PPE
CR IP
1,500,000
1,500,000
31.12.2016
DB DEPRECIATION
CR ACCUMULATED DEPRECIATION
75,000
75,000
how to calculate depreciation
To calculate depreciation, you need to know the asset's initial cost, estimated useful life, and residual value.
1. Determining the initial cost:
The initial cost is the amount of money paid to acquire the asset, including any expenses incurred to make it ready for use. In this case, the initial cost is $1,500,000.
2. Estimating the useful life:
The useful life is the period over which the asset is expected to generate economic benefits. It is generally determined based on experience or industry standards. For example, if the building is expected to be used for 30 years, then the estimated useful life is 30 years.
3. Determining the residual value:
The residual value is the estimated value of the asset at the end of its useful life. It is often assumed to be zero, but it can also be an estimated amount. In this case, let's assume the residual value is zero.
Once you have these three pieces of information, you can calculate depreciation using various methods, such as the straight-line method, declining balance method, or units of production method.
Let's assume we use the straight-line method, which evenly spreads the depreciation expense over the useful life of the asset:
Depreciation expense = (Initial cost - Residual value) / Useful life
Using the given information:
Depreciation expense = ($1,500,000 - $0) / 30 years = $50,000 per year
So, the depreciation expense for the year 2016 is $50,000.