Question

M-One Ltd is a firm incorporated in Singapore, with December 31 year-ends and adopts the Singapore Financial Reporting Standards. On 1 April 20X1, it purchases telecommunications equipment for $240,000 in cash. The equipment is expected to have a useful life of 6 years with no residual value. It uses the straight line depreciation method for all equipment. It also adopts the revaluation model whereby the gross carrying amount is restated proportionately to the change in the carrying amount. On 31 December 20X1, M-One Ltd chooses to revalue this equipment to its fair value of $220,000. At the end of 31 December 20X2, M-One Ltd disposed of the equipment at $180,000.

Demonstrate the accounting for this equipment by preparing the journal entries for the year ending 31 December 20X1 and year ending 31 December 20X2. Where rounding is required, please round your answers to the nearest number.

Answer 1

Asset purchased on 1 April 20X1

Cost = $240,000

Useful Life = 6 years

Residual value = 0

Depreciation - Straight line depreciation

Straight line depreciation = (Cost - residual value) / useful life

= ($240000-0) / 6

= $40000

Journal entry on 31 December 20X1

Depreciation for the period 1-4-20X1 to 31-12-20X1 = 9 month depreciation

   = ($40000/12)*9

   = $30000

so the asset value on 31 -12 - 20X1     = Original Cost - Depreciation

= $240,000-$30,000

= $210,000

The revalued amount of telecommunication equipment as on 31 December 20X1 = $220,000

So the revaluation gain = Revaluation amount - Cost of the asset after depreciation
= $220,000 - $210,000

= $10,000

So the journal entries for the period 31 December 20X1 are shown below:

1) Depreciation account dr $30,000

to telecommunication equipement $30,000

( Depreciation for 9 month =(40000/12)*9 = 30000 debited to asset account)

2) Telecommunication equipement a/c dr $10,000   

to revaluation gain $10,000

( Revaluation gain credited to telecommunication equipment by $10,000)

3) Profit and loss account a/c dr $10,000   

Depreciation $10,000

( Revaluation gain credited to telecommunication equipment by $10,000)

Journal entries for the period 31 December 20X2

The revalued amount of telecommunication equipment as on 31 December 20X1 = $220,000

Depreciation should be recalculated because, cost of the asset changed from buying cost to revalued amount. And balance useful life is 5 years and 3 months.

So the straight line depreciation = $220,000 / 5.3

= $41,509

So the depreciation for the year 31 December 20X2 = $41,509

So the carrying value on 31 December 20X2 = $220,000 - $41,509 = $178,491

Sale value of telecommunication equipment = $180,000

Gain on sale    = $180,000 - $178,491 = $1,509

So the journal entry for 31 Decmeber 20X2 is as follows:

1) Cash account debt $180,000

telecommunication equipment $178,491

Gain on sale $1,509

(Recognization of sale of asset)

2) Depreciation $41,509

telecommunication equipment $41,509

(Recognization of depreciation)

3) Profit and loss account $40,000

Depreciation $40,000

(Depreciation charged to profit and loss account)

4) Depreciation account $1,509

Revaluation gain $1,509