The student will note that the office appliances account now carries a value of $1,050, of which the $50 represents the value of the betterment.
It might appear that since the renewal occurs at the end of six years there has been accumulated in the reserve by that time only $60 covering this specific part, and that therefore only $60 should be transferred from the reserve account, the other $40 being charged to a proprietorship account to represent the additional expense or loss not yet provided for by the depreciation charges during the past six years. That is not the situation, however, for if the periodic depreciation has been correctly estimated, the entire amount, $100, has already been charged off and is therefore included in the reserve. When the asset was originally installed and the length of its life estimated for the purpose of determining the periodic depreciation charge, the policy as to repairs and renewal of parts was taken into consideration. Such estimates cannot, of course, be absolutely accurate. However, until such time as a definite basis is given on which to check the amount of the over-or under-estimate, it is the standard practice to charge against the reserve the original value of the renewed part. Always at the time of discard of the entire asset—and sometimes sooner—such a definite basis is given and adjustment must be made in accordance with the facts then ascertained. A problem will illustrate the considerations involved.
Continuing the foregoing example, assume that the office appliance, now valued at $1,050 with a reserve of $500, is discarded after ten and a half years’ service.
At the end of the tenth year the annual depreciation charge of $105 will have brought the reserve account to a total of $920. Six months later, at the time of discard of the asset, there will be accrued depreciation, not yet booked, amounting to $52.50. It is, accordingly, necessary to book this amount by means of the following entry:
| Depreciation | 52.50 | ||
| Depreciation Reserve Office Appliances | 52.50 | ||
This entry charges the current period with its share of the consumed value of the asset. The next step is to transfer the reserve account to the asset account, to show in that account the amount of the inaccuracy in the depreciation estimate—the amount by which the actual depreciation differs from the estimate. The entry is:
| Depreciation Reserve Office Appliances | 972.50 | ||
| Office Appliances | 972.50 | ||
The office appliance account now shows a debit balance of $77.50, which indicates the value or amount of the asset which has been consumed but which has not been charged against the income of the periods during which the asset was used. It is manifestly inequitable to charge this amount against the income of the six months of the current period, and it is impossible to go back and spread it over the previous periods because their records have been closed. The charge must therefore be made direct to the Surplus account in the case of a corporation, or to a final section for extraordinary profits and losses of the regular Profit and Loss account in other cases. It may be handled by this latter method also in the case of a corporation. The entry needed is, therefore:
| Surplus | 77.50 | ||
| Office Appliances | 77.50 | ||
In case the reserve is more than the value of the asset at the time of discard, it means that more than the cost of the asset has been charged as expense. Accordingly, the excess represents real profit and must be transferred to surplus. The necessary entry is: