A company bought a building for £400,000 with a useful life of 50 years and no residual value. After 10 years it was revalued to £600,000, with no change in its total useful life. The company makes an annual transfer of excess depreciation from the revaluation surplus to retained earnings. What is the amount of the annual transfer?

Correct answer: D) £7,000

Explanation

Depreciation based on cost = £400,000 / 50 = £8,000 a year. Remaining life after 10 years = 40 years, so depreciation based on the revalued amount = £600,000 / 40 = £15,000. The excess depreciation transferred from the revaluation surplus to retained earnings = £15,000 - £8,000 = £7,000. This equals the surplus of £280,000 spread over the remaining 40 years.