Question

Question 4 On 1 July 20x1, Large Mart purchases a new building (and the associated land) in Sydney. Large Mart paid $1,000,000 for the land and $800,000 for the building. Large Mart will use the building for 30 years, after which time the building will have a residual value of 50,000. Large Mart will depreciate this building, using the declining balance depreciation method, with a yearly depreciation percentage of 6.67%. On 1 July 20x3, Large Mart decides to revalue the building (current fair value 600,000) to its most up-to date fair value. Required: A) Calculate the yearly amount of depreciation for the building for the year ended 30 June 20x3, AND provide an outline of your calculations. B) Provide all journal entries that are necessary to record the depreciation of the building for the years ended 30 June 20x2 and 30 June 20x3, AND the revaluation of the building on 1 July 20x3, AND provide an outline of all necessary calculations.

Answer 1

A) CALCULATION OF YEARLY AMOUNT OF DEPRECIATION FOR THE BUILDING:

on 1 july 20x2 Depreciation = $53,360

($8,00,000*6.67% = $53,360)

on 1 july 20x3 Depreciation = $49,800

($7,46,640*6.67% = $49,800)

(8,00,000-53,360 =7,46,640)

B) JOURNAL ENTRIES FOR THE BUILDING:

on 1 july 20x2 Depreciation a/c $53,360

To Building a/c $53,360

(being amount of depreciation calculated on the asset under written down value method)

on 1 july 20x2 profit & loss a/c $53,360

To depreciation a/c $53,360

(being amount of depreciation is transferred to profit & loss a/c)

on 1 july 20x3   Depreciation a/c $49,800

To Building a/c $49,800

(being amount of depreciation calculated on the asset under written down value method)

on 1 july 20x3

profit & loss a/c $49,800

To depreciation a/c $49,800

(being amount of depreciation is transferred to profit & loss a/c)

REVALUATION OF ASSET:

CALCULATION OF REVALUATION GAIN/LOSS

Asset carrying amount as on 1 july 20x3 $6,96,840

Asset fair value  as on 1 july 20x3 $6,00,000

Loss $96,840

ENTRY:

on 1 july 20x3

Revaluation reserve/surplus a/c $96,840

To Building a/c   $96,840   

(being loss due to revaluation of building is transferred to Revaluation reserve)

A revaluation loss should be charged against any related revaluation surplus to the extent that decrease does not exceed the amount held in the revaluation reserve in respect of the same asset. Any additional loss should be charged as an expense in te statement of profit & loss a/c.

Asset should be depreciated on the revalued figure for the next year till the life time of the asset.