Whenever an asset is revalued, the profit on revaluation is transferred to the revaluation reserve account. However, the revaluation also gives rise to backlog depreciation. This backlog depreciation should be charged to the revaluation reserve account. The concept of backlog depreciation is illustrated in the next section. Backlog depreciation = Difference in depreciation - Depreciation chargeable in current year Compute the backlog depreciation using the information given below: Replacement cost of the machine on 1/1/2024 (Current value) = $20,000,000 Expired life on 1 January 2024 = 5 years Depreciation under CCA = (20,000,000 x 5) / 10 = $1,000,000 Replacement/Current value on 12/31/2024 = $22,000,000 Expired life on 31 December 2024 = 6 years Depreciation under CCA = (22,000,000 x 6) / 10 = $13,200,000 Difference in Depreciation = 13,200,000 - 10,000,000 = $3,200,000 Current year's depreciation = (20,000,000 + 22,000,000) / (2 x 10) = $2,100,000 Backlog depreciation = Difference in depreciation - depreciation chargeable in current year = 3,200,000 - 2,100,000 = $1,100,000Backlog Depreciation: Definition
Formula to Calculate Backlog Depreciation
Example
Solution
Backlog Depreciation FAQs
Backlog Depreciation is calculated by subtracting the current year’s Depreciation from the difference in Depreciation between the replacement cost and expiry of useful life.
The entire charge will be shifted to the revaluation reserve account, which is a component of equity similar to share capital. However, the portion of Depreciation that is charged to revaluation reserve account should be reversed into capital. If this is not done, the balance will remain in the account and will be removed by using it as an additional charge towards replacement cost on next valuation.
Backlog Depreciation arises due to the inconsistency of revaluation of assets. Hence this amount is transferred to the revaluation reserve account which has a higher tax credit compared to normal Depreciation charges.
Backlog Depreciation will be equal to difference in Depreciation between replacement cost and expired life. For example, if the current value of an asset is $10,000 and its accounting life has expired, then backlog Depreciation = $10,000 – $0 = $10,000.
Backlog Depreciation will be equal to difference between current replacement cost and expired life. For example, if the current value of an asset is $10,000 and its accounting life has expired, then backlog Depreciation = $12,000 – $10,000 = $2,000.
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