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.
