Question

GTUC owns a property that it is using at its head office. At 1 January 2018, its carrying value was $20 million and its remaining useful life was 20 years. On 1 July 2018 the business was reorganized and cheaper premises were found for use as a head office. It was therefore decided to lease the property under an operating lease.

The property was valued by a qualified professional, who assessed the property’s value as $21 million on 1 July and $21.6 million on 31 December 2018.

Explain the accounting treatment of the property,plant and equipment in the financial statements for the year-ended 31 December 2018.

Answer 1

Solution:

Under the operating lease, the ownership rights of property remains with lessor,

Thus even after the property is leased , it will be shown in the balance sheet as an asset , under property plant and equipment ,and depreciation will be charged on it, in the lessor company's books of account.

Accounting treatment of Revaluation of property:

Step 1.

Calculation of carrying amount of property as on 1st July:

Given that the carrying amount of the property as on 1st January 2018 is $ 20 million

Remaining useful life = 20 years

amount of depreciation using straight line method = $ 20 million ÷ 20 years

= 1 million per year.

Depreciation from 1st January to 1st July:

depreciation for 6 month = 0.50 million

Carrying value of property as on 1st July = carrying value as on 1st January - depreciation till 1st July

= $ 20 million - 0.5 million

= 19.5 million

Step 2.

Accounting treatment of revaluation of property:

An item of property plant and equipment ,whose fair value can be measured reliably, shall be carried at revalued amount being its fair value at the date of the revaluation.

As the property is valued by a professional valuer as on 1 july 18 at $ 21 million. it will be recorded in the books on its fair value.

Increase in value on revaluation :

= fair value on revaluation - carrying value as on date

= $ 21 - 19.5 million

= $ 1.5 million

If an asset carrying amount is increased as a result of revaluation , increase is recognised in income,

and added in equity under the heading of revaluation surplus.

Thus the revaluation surplus of 1.5 million dollars will be treated accordingly.

Step 3.

Accounting treatment of property as on 31st December 2018:

Fair Value of propery is 21.6 million as on 31 dec 2018.

Property will be recorded at the revalued amount that is fair value $ 21.6 million as on 31st December 2018 .

Carrying amount of asset as on 31st December 2018

= value as on 1 july - depreciation from july to december.

= $ 21 million - 0.5 million

= $20.5 million

Calculation of revaluation surplus:

Fair value on date - carrying value on date

= $ 21.6 million - 20.5 million

= 1.1 million

This revaluation surplus should be credited as income and added in equity as revaluation surplus.

Finish.