Question

TOKI PJSC owns two pieces of land in Dubai. Land A was purchased in 2013 at a cost of Dh10 million while Land B was purchased in 2014 at a cost of Dh12 million. The lands were classified as fixed assets, and were revalued as follows:

	Open market value
	Land A	Land B
Years revalued	Dh million	Dh million
2015	8	16
2017	12	11
2019	11	14

Required:

At each valuation date, calculate the surplus or deficit arising on the revaluation of both lands, respectively

Question 2

The inventory information of Amatali Company is given as follows:

Historical cost	Dh12,000
Replacement cost	Dh7,000
Expected selling price	Dh9,000
Expected selling cost	Dh500
Normal profit margin	50% of price

After the above-stated adjustment, the expected selling price becomes Dh13,000 while the other information remains the same. According to International Accounting Standard (IAS) 2, after this change in the expected selling price, what adjustment should be done to the inventory?

Select one:

a. Inventory should be increased (debited) by Dh1,000.

b. Inventory should be increased (debited) by Dh4,000.

c. No adjustment should be made to inventory once it is written down.

d. Inventory should be increased (debited) by Dh3,500.

Answer 1

Solution 1:

Building A - Year 2015:

8,000,000 - 10,000,000 = Deficit of Dh 2,000,000

Building A - Year 2017:

12,000,000 - 10,000,000 = Surplus of Dh 2,000,000

Building A - Year 2019:

11,000,000 - 10,000,000 = Surplus of Dh 1,000,000

Building B - Year 2015:

16,000,000 - 12,000,000 = Surplus of Dh 4,000,000

Building B - Year 2017:

11,000,000 - 12,000,000 = Deficit of Dh 1,000,000

Building B - Year 2019:

14,000,000 - 12,000,000 = Surplus of Dh 2,000,000

Solution 2:

Answer : Option B - Inventory should be increased (debited) by Dh 4,000

Calculation:

According to IAS, historical cost is the original cost where inventory firstly bought. As per accounting principles, inventories are to be shown at lower of the following amount;

1. Market price (or) 2. Actual selling price less any expenditure to be incurred.

But, if the actual selling cost is less than replacement cost, the loss should be recorded to books of account

In this problem, historical cost is Dh 12,000 and replacement cost us Dh 7,000

Using this formula,

Actual selling cost = Expected selling price - profit margin - expected selling cost

= 9,000 - (9,000 × 50%) - 500

= Dh 4,000

Therefore, inventory should be increased (debited) by Dh 4,000