In: Accounting
(a)
Explain when a revaluation decrement should be shown as a negative
item in ‘Other Comprehensive Income’, rather than being debited to
the profit or loss?
(b)
ChopChop Pty. Limited purchased a block of land in Melton, VIC, on
1 December 2019. The land was purchased for $500,000 in cash. Since
then, the value of the land has increased due to rapid development
in public transport in the area. On the 30th of March 2020, the
land had market value of $750,000. On the 4th of April 2020, the
land was sold for $825,000. ChopChop is NOT registered for
GST.
Required:
Prepare journal entries for:
(1) 30 March 2020
(2) 4 April 2020
(a)
Measurement subsequent to initial recognition
IAS 16 permits two accounting models:
Cost model. The asset is booked at cost less accumulated depreciation and impairment.
Revaluation model. The asset is booked at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.
The revaluation model
Under the revaluation model, revaluation should be made regularly, so that the carrying amount of an asset does not differ materially from its fair value at the end of reporting period.
If a revaluation results in an increase (+ve) in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. A decrease arising due to revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.
When a revalued asset is disposed of/ sold, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss.
(b)
Cost of land as on 1st Dec, 2019 | 500,000 | |||
market value of Land as on 30th March, 2020 | 750,000 | |||
Increase in value | 250,000 | |||
Revaluation transaferred to OCI | 250,000 | |||
Journal entry for 30th March, 2020: | ||||
Land | Dr. | 250,000 | ||
To Other Comprehensive Reserve A/c | Cr. | 250,000 | ||
(Being Revaluation of land recognised) | ||||
Land sold on 4th Apr, 2020 | 825,000 | |||
Carrying value of Land as on 4th April, 2020 | 750,000 | |||
Profit on sale | 75,000 | |||
Journal entry for 4th April, 2020: | ||||
Bank A/c | Dr. | 825,000 | ||
To Land | Cr. | 750,000 | ||
To Profit on sale of Land | Cr. | 75,000 | ||
(Being profit on sale of asset recorded) | ||||