Question

Rooey Ltd, the retailer of Zara clothing, is preparing its end of year financial statements at 31 December 2020. The balance sheet shows only two non-current assets, buildings and equipment. After depreciation entries were completed for the year ending 31 December 2020, the accumulated depreciation of its non-current assets were as follows:

                                                                                                       $

                                 Buildings                                                 24,200,000

                                 Accumulated Depreciation                     (5,000,000)

                                 

                                 Equipment                                                7,000,000

                                 Accumulated Depreciation                      (3,800,000)

The company applies the revaluation model to buildings and the cost model to equipment. At 31 December 2020, the following values relating to the assets have been determined:

	Fair value	Value in use	Costs to sell
Buildings	$15,500,000	$15,600,000	$600,000
Equipment	$1,700,000	$1,300,000	$300,000

Required:

1. Prepare the necessary general journal entries in relation to the equipment for the year ended 31 December 2020 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

2. Prepare the necessary general journal entries in relation to the buildings for the year ended 31 December 2020 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

3. Prepare the necessary general journal entries in relation to the buildings for the year ended 31 December 2021 and justify in accordance with appropriate accounting standards. Assume the depreciation for the year is $1,000,000 and the fair value of the buildings at 31 December 2021 was $25,000,000. Show all workings (narrations are not required).

Answer 1

Given information

	Building	Equipment
Cost of the asset	$24,200,000	$7,000,000
Accumulated depreciation	$5,000,000	$3,800,000
Carrying amount of the asset	$19,200,000	$3,200,000
Fair valueof the asset	$15,500,000	$1,700,000
Value in use	$15,600,000	$1,300,000
Costs to sell	$600,000	$300,000

Recognition of Impairment loss: Where the carrying amount of an asset exceeds the recoverable amount, an impairment expense amounting to the difference is recognized in the period.

Recoverable amount equals to the higher of the follwing:

a. Fair value less costs to sell and

b. Value in use

	Building	Equipment
a. Carrying amount of the asset	$19,200,000	$3,200,000
b. Fair value less costs to sell	$14,900,000	$1,400,000
c. Value in use	$15,600,000	$1,300,000
d. Higher of Fair value less costs to sell and Value in use is	$15,600,000	$1,400,000
e. Impairment loss (a - d)	$3,600,000	$1,800,000

(a) Preparation of the necessary general journal entries in relation to the equipment for the year ended 31 December 2020:

Date	General Journal	Debit	Credit
December 31, 2020	Impairment Loss A/c Dr.	$1,800,000
	Accumulated impairment losses A/c Cr.		$1,800,000

(b) Preparation of  the necessary general journal entries in relation to the buildings for the year ended 31 December 2020 :

Date	General Journal	Debit	Credit
December 31, 2020	Impairment Loss A/c Dr.	$3,600,000
	Accumulated impairment losses A/c Cr.		$3,600,000

(c) Preparation of  the necessary general journal entries in relation to the buildings for the year ended 31 December 2021:

Carrying amount as at December 31, 2020 = Cost of Building - Accumulated depreciation - Accumulated Impairment Losses

= $24,200,000 - $5,000,000 - $3,600,000 = $15,600,000

Depreciation for the year 2021 = $1,000,000

Carrying amount as at December 31, 2021 = $15,600,000 - $1,000,000 = $14,600,000

Fair value/ Recoverable amount of the building as at December 31, 2021 = $25,000,000

The surplus of the recoverable amount over carrying amount = $25,000,000 - $14,600,000 = $10,400,000

Building appreciation = $10,400,000

As the Building appreciation exceeds the previously recognized accumulated impairment losses, the gain on revaluation must be recognized.

Amount to be transferred to Revaluation Reserve = $10,400,000 - $3,600,000 = $6,800,000

Jouranl entry will be as follows:

Date	General Journal	Debit	Credit
December 31, 2021	Accumulated Impairment Loss A/c Dr.	$3,600,000
	Building A/c Dr.	$6,800,000
	To Gain on Revaluation A/c Cr.		$3,600,000
	To Revaluation Reserve A/c Cr.		$6,800,000