Question

On January 1, Year 1, Company ABC hired a general contractor to begin construction of a new office building. ABC negotiated a $900,000, five-year, 10% loan on January 1, Year 1, to finance construction. Payments made to the general contractor for the building during Year 1 amount to $1,000,000. Payments were made evenly throughout the year. Construction is completed at the end of Year 1, and ABC moves in and begins using the building on January 1, Year 2. The building is estimated to have a 40-year life and no residual value. On December 31, Year 3, ABC determines that the market value for building is $970,000. On December 31, Year 5, ABC estimates the market value for the building to be $950,000.

Required: Use the two alternative methods allowed by IAS 16 with respect to the measurement of property, plant, and equipment subsequent to initial recognition to determine:

1. THe carrying amount of the building that would be reported on the balance sheet at the end of Year 1-5

2. The amounts to be reported in net income related to this building for Years 1-5

Answer 1

(1) Cost Model

Cost model the assets will be shown in balance sheet at initial acquisition price along with accumulated depreciation as per IAS 16

we can tabalized this as below for above problem

Year Depreciation Accumulated Depreciation Carrying Amount

Year 1 0 0 1000000

Year 2 25000 25000 1000000

Year 3 25000 50000 1000000

Year 4 25000 75000 1000000

Year 5 25000 100000 1000000

Depreciation is calculated on Straight Line method as below

= Cost of assets - residual value / life of assets = 1000000 - 0 / 40 = 25000 per year

Initial Cost is taken of the date on which the assets is intended to use i e 1000000 on Dec 31 Y 1 as given in problem

2 ) Revaluation Method

In this method one has to revalue its assets and difference between fair asset and carrying price will be identify as revaluation surplus under equity and the value of corrospending assets will be increased

so we can interprate by this table

Year Depreciation Acc Dep Increase in Building Value Revaluation Surplus Carrying value of Build.

Year 1 0 0 1000000 0 1000000

Year 2 25000 25000 0 0 1000000

Year 3 25000 50000 20000 20000 970000

Year 4 25526 75526 0 0 970000

Year 5 25526 101052 31052 31052 950000

Working

Initial cost is reognised at $1000000 at year 1 end

revaluation at end of year 3

Assets value 1000000

Acc Dep 50000

value of building 950000

Fair price 970000

Value to be upward revision in building +20000

So value of building increased by $20000 and same amount is credited to revaluation surplus

Depreciation from year 4 onwards

value of assets 970000

Remaining life 38 Years

So depreciation from year 4 will be = 970000 / 38 = $25526

Revaluation at year 5

Value of assets 970000 - 25526-25526 = $918948

Fair Value (Market Value) $950000

Value of building to be increases =$31052

So at the end of year 5 $ 31052 will be debited to building a/c and $ 31052 will be credited to revaluation surplus and the assets will be showed at $950000 in balance sheet at the year 5 end

Only depreciation for every year will be reported in income statment as per prescribed method in financial statment of ABC

So above is the solution to problem.