Question

In: Accounting

When I look at the statement of financial position, one of the categories of non-current assets...

When I look at the statement of financial position, one of the categories of non-current assets is ‘investment properties’ and another category is ‘property, plant and equipment’ – in which all other properties are included. Surely, we invest in all our properties, so why do we have two categories for them in the statement of financial position? How do we decide what goes into ‘property, plant and equipment’ and ‘investment properties’?
In addition, a note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives? Another note states that property included in ‘property, plant and equipment’ is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in the financial statements on a consistent basis? Don’t you think this is a clear violation of consistency concept?
Finally, I can’t immediately see from the financial statements where the gains or losses relating to the measurement of investment properties are included. The profit statement seems to include two main components – profit or loss and other comprehensive income. Where would the gains or losses go? Presumably, is the treatment of gains and losses the same for any non-current assets which are measured at fair value?
Required:
Given the above facts, discuss clearly what constitute ‘property, plant and equipment’ and investment property’. You are also required to explain the correct accounting treatment of revaluation gain and loss, and fair value gain and loss.

Solutions

Expert Solution

Property ,Plant and Equipment (PP&E) is a non- current tangile asset shown on the balance sheet of a business and is used to generaterevenues and profits. It also plays a key part in the finnancial planning and analysis of a company's operation and future expenditure, especially with ragards to capital expenditure.

PPE account often denoted as net of accumulated depreciation, which means that if a compny does not purchase additional new equipment, then net PPE is slowly decrease in value every year due to depreciation.

PPE assets are tangible,identifiable and expected to generate an economic return for the company for more than one year or one operating cycle.The account can include machinery, equipment, vechicle, buildings, land, office, equipment, and furnishings, among other things.

If a company produces machiery (for sale), that machinery does not classify as PPE. the machinery usedto produce the machiery for sale is classified as inventory.

The formula for fiding the net PPE= Gross PPE + Capital Expenditure - Accumulated Depreciation.

PPE should be recognised bya a company only if;

1. it is probable that future economic benefits associated with the assets will flow to the entity over a period of more than one year; and

2. the cost of the asset can be calculated or estimated reliably.

The initial cost of a PPE item may include:

1. is purchase price, any import duties, non-refundable taxes, sales discounts, and rebates

2. any cost directly arrtibutable to bringing to the assets to the location and condition necessary for it to be operational.

3. an estimated value of the costs of dismanting and removing the asset and restoring the site on which it is located. This is commonly refered to asan asset retiement obligtion(ARO).

the major component of the PPE is depreciation. Depreciation reduce the vale of property plant, and equipment on the balance sheet as the valueof assets is lowered over time due to wear and tear and reduction of their their useful life. The depreciation expense is used to reduce the value of the net balance and it flows to the income statement as an expense..

ACCOUNTING TRETMENT FOR REVALUATION GAIN AND LOSS

Fixed asset revluation is the process of inceasing or decreasing the carrying value of fixd asset

The adjustments of revaluation non- current assets are as follows;

Carrying amount of Non- current Assets on revaluation date - Valuation of Non- current Assets (revalued assts price) = gain or loss from valuation

REVALUATION GAIN TREATMENT

It is always recognized in Equity. the accounting entry are as follows;

Non- current asset cost dr

accumulated depreciation dr

revaluation gain/ reserve cr

EXAMPLE

A comany purchases a building on 1st April 2011 for $100000. The useful life of assets was 10 years. On 1st April 2013, the compny revalued the building to its current fair value of $120000. what would be the double entry to record this transaction

CALCULATION OF CARRYING AMOUNT

Total purchase value = 100000

less accumulated Depreciation (100000*2/10) = 20000

carrying value = 100000-20000=80000

CALCULATION OF REVALUATION GAIN/ LOSS

carrying amount = 80000

revalued amount = 120000

revaluation gain/reserve = 120000- 80000= 40000

JOURNAL ENTRY

Non- current asset cost dr 20000

Accumulated depreciation dr 20000

Revaluation reserve(gain) cr 40000

REVALUATION LOSS TERATMENT

It should be chrged againstany related revaluation surplus to the extent that the dcrease does not exceed the amount held in tnerevaluation surplus in respect of the same asset.Any additional cost should be charged as an expenses in the statement of profit and loss.

Journal entry:

Revaluation reserve (maximum Orginal gain) dr

Income statemrnt(any residual losses) dr

Non-current assets (loss on revaluation) cr


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