Question

Question 1 ABC Ltd bought a property for office accommodation on 3 January 20X1 for $33m. The land component of the property was on a 60-year lease and was valued at $3m, the balance being the value of the building. The estimated useful life of the building was 30 years and the residual value was expected to be insignificant. On 1 January 20X2, the estimated useful life of the building was revised to 20 years from that date. This was considered to be more realistic estimate as the management’s intention was to construct a larger building on the site. On 1 January 20X3, ABC Ltd decided to revalue the property to $54m, out of which land was valued at $6.5m. Since then, there has not been material change in the fair value of the property. On 10 December 20X4, the property was sold for $60m. It is the company’s policy to provide for a full year’s depreciation on fixed assets in the year of purchase and none in the year of sale.

Required: a) Complete the schedule as provided to calculate the depreciation/amortisation and carrying amount.

b) Complete the journal entries as provided to record the above transactions.

c) Complete the extracts of financial statement as provided for financial years 20X1, 20X2 and 20X3.

Answer 1

		Debit	Credit
		(Amount $)	(Amount $)
1/1/2011	Land A/c Dr	3,000,000
	Building A/c Dr	30,000,000
	To Cash a/c		33,000,000
	(Being asset purchased)
31/12/11	Depreciation a/c Dr	1,000,000
	To Accumualted depreciation a/c		1,000,000
	(being depreciation provided for the year on the buidling value of 300,00,000, useful life is 30 years=30000000/30=100,0000)
	useful life revised, therefore on the net book value the new depreciation to be calculated
31/12/12	Depreciation a/c Dr	1,450,000
	To Accumualted depreciation a/c		1,450,000
	(being depreciation provided for the net book value of the buidling value of (30,00,000-100,000=29,00,000) , revised useful life is 20 years=29,00,000/20=145,000)
1/1/2013	Land A/c Dr	3,500,000
	To Revaluation reserve a/c		3,500,000
	(Being revalued land value revised from 3m to 6.5 m accounted)
1/1/2013	Property a/c Dr	17,500,000
	To revaluation reserve a/c		17,500,000
	(Being revalued property value revised from 30m to 54 including 6.5 for land. Therefore for property it is 54m-6.5m=47.5m)
	Gross value	30,000,000
	Less: accumulated depreciation	1,000,000
		29,000,000
	Less: accumulated depreciation	1,450,000
	Net book value 31/12/12	27,550,000
	net book value as at 1/1/2013 is	27,550,000
	revaluation value	47,500,000
	Depreciation for 2 years @ 20 years	20
	Depreciation for 1 year	2,375,000
	Depreciation for 2nd year	2,375,000
	depr already provided for 2 years 1000000+1450000	2,450,000
	Depr to be provided	4,750,000
	Difference depr to be provided	2,300,000
1/1/2013	Depreciation a/c Dr	2,300,000
	To Accumualted depreciation a/c		2,300,000
	(Being revised depreciation accounted)
31/12/13	Depreciation a/c Dr	2,375,000
	To Accumualted depreciation a/c		2,375,000
	(Being depreciation accounted for the year on the new revalued value)
10/12/2014	Cash a/c Dr	60,000,000
	Revaluation reserve a/c Dr	21,000,000
	Accumulated depreciation a/c Dr	7,125,000
	To Property value		47,500,000
	To land value		6,500,000
	To profit on sale of property		34,125,000
		88,125,000	88,125,000
	(Being land and property were sold at 60m there fore the revaluation reserve created should be reversed alongwith the accumulated depreciation and the value of the properties balance will be the profit on sale of property) As specified 2014 year depreciation not calcualted.