Welcome to today’s class. We will be learning about the Sum of the Year Digit and Revaluation methods of Depreciation.
By the end of this lesson, you should be able to;
- Explain the sum of the Year Digit and Revaluation Method
- Calculate depreciation using the Sum of the year digit and revaluation method
Under this method the asset is revalued each year, any difference being charged to the profit and loss account.
This method is good for assets which cannot be easily depreciated because of their nature e.g. loose tools (i.e. bolts, nuts, hammer, chisel, screws) livestock, farm crops/plantations etc. The value of the assets at the beginning and end of the year will be estimated and used in the calculation of the depreciation.
On 1st January 2005, the value of loose tools was N25,000. Purchases of loose tools during the year was N7,000. On 31st December 2005, the loose tools were revalued at N24,000
Required: Calculate the depreciation on a loose tool for the year.
Balance of loose tools 1 Jan 2005 25,000
Add: Purchases of loose tools in 2005 7,000
Less: Balance of loose tools 31 Dec 2005 24,000
Depreciation on loose tools for 2005 8,000
ADVANTAGES OF THE REVALUATION METHOD
- It is suitable (or ideal) for loose tools, livestock etc.
DISADVANTAGES OF THE REVALUATION METHOD
- It cannot be used for all classes of assets.
- Revaluation of assets on yearly basis may be cumbersome