Question

(ii) Broadoak acquired a 12-year lease en a property on 1 October 2016 at a cost of S240,000. The company policy is to revalue its properties to their market values at the end of each year. Accumulated amortization is eliminated and the property is restated to the revalued amount. Annual amortization is calculated on the carrying values at the beginning of the year, The market values, of the property on 30 September 2017 and 2018 were $231,000 and $175,000 respectively, The existing balance on the revaluation reserve at 1 October 2016 was S50,000. This related to some non-depreciable land whose value had not changed significantly since 1 October 2016.

Required: Prepare extracts of the Fiancial statements of of Broadoak. (including the movement on the revaluation reserve) for the years to 30 September 2017 and 2018 in respect of the leasehold property

Answer 1

Statement of financial position as on 30.09.2017

Market value of lease property = 231000

Revaluation Surplus = Balance as on 30.09.2016 + Revaluation Gain

= 50,000 + ( Market value as on 30.09.16 - Book value post amortization)

= 50000+ 11000 { 231000 - (240000-20000) }

= 61000

Amortization during the year = 240000/12 = 20,000

Revaluation Gain = 11000

Reamaing life of lease = 11 years

Transferred to retained earnings = 11000/11 = 1000

Balance revaluation Gain = 10000

Similarly for 30.09.2018

Cost at 30.09.2016 = 240000

Less :Amortization = 20000

Balance 30.09.2017 = 220000

Add : Revaluation Gain = 11000

Balance = 231000

Less : Amortization 231000/11 = 21000

Balance as on 30.09.2018 =210000

Market value as on 30.09.2018 = 175000

Difference Revaluation loss = 35000

Less : Revaluation loss to revaluation surplus = 10000

Balance Revaluation loss to income statement : 25000

Carrying amount as on 30.09.2018 = 175000