Question

Handy Distributors Inc. (HDI) includes a wholesale division and a retail division. Relevant information pertaining to its retail division (RET) is as follows:

- The net assets of RET were acquired by HDI in 20X1. HDI allocated $400,000 to goodwill upon acquisition.

- RET is a cash-generating unit (CGU). Its assets have not previously been impaired.

- HDI reports its financial results in accordance with IFRS.

- HDI’s year end is December 31.

- RET uses the elimination method option of the revaluation model to report its land. It transfers the revaluation surplus, if any, to retained earnings only upon derecognition.

- RET depreciates all its depreciable assets annually on a straight-line basis.

Part A

- Details of the Property, Plant and Equipment follow:

	LAND	BUILDINGS	EQUIPMENT	TOTAL PPE
purchase date	Jan 1 20X4	Jan 1 20X4	Jan 1 20X4
estimated useful life		20 years	5 years
estimated residual value		$0	$0
cost	$700,000	$1,600,000	$500,000	$2,800,000
revaluation at Dec 31 20X4	$690,000
revaluation at Dec 31 20X5	$730,000

RET rounds all depreciation calculations to the nearest dollar (for example, $21) and percentages to two decimal places (for example, 14.71%). You should do likewise in your supporting calculations.

Required:

a) Calculate the annual depreciation of each asset held by RET for each of the 20X4 and 20X5 fiscal years.

b) Provide the year-end adjusting journal entries pertaining to the revaluation of the land, and depreciation of the building and equipment for the 20X4 and 20X5 fiscal years. Ensure that the journal entries are dated and include a brief description of the pertinent details. Prepare a separate journal entry pertaining to each asset class. Supporting calculations are to be referenced or included in the description.

Part B

On January 1, 20X6, the Board of Directors of HDI decided to list RET for sale and determined that it met the criteria of a disposal group. Independent of Part A, assume that RET had previously used the cost model to value its property, plant and equipment. Following is the net book value of the various assets, together with their estimated fair value and other information:

	NBV Jan 1 20X6	Value in use Jan 1 20X6	FV Jan 1 20X6	Estimated costs of disposal	FV less disposal costs Jan 1 20X6
Land	$730,000		$730,000	$75,000	$655,000
Buildings	1,500,000		1,500,000	150,000	1,350,000
Equipment	290,000		290,000	15,000	275,000
Goodwill	400,000
Disposal group	$2,920,000	2,700,000	2,520,000	240,000	2,280,000

- HDI estimates that the value in use of the RET disposal group is $2,700,000.

- HDI estimates that the fair value of the RET disposal group is $2,520,000 and that the disposal costs will be approximately $240,000.

- On June 14, 20X6, HDI received $2,385,000 cash from the sale of the RET disposal group ($2,660,000 less a $275,000 sales commission).

Required:

Prepare a summary of the journal entries RET will need to make to record the board’s decision to designate RET as a disposal group and to record its subsequent sale. Ensure that the journal entries are dated and include a brief description of the pertinent details. Supporting calculations are to be referenced or included in the description of each journal entry.

Answer 1

As per the guideline, only Part A has been answered.

a)	Annual depreciation
	LAND	BUILDINGS	EQUIPMENT
estimated useful life		20 years	5 years
cost	$700,000	$1,600,000	$500,000
estimated residual value		$0	$0
Annual depreciation = (Cost-residual value)/Useful life		$80,000	$100,000
Annual Depreciation for 20X4		$80,000	$100,000
Annual Depreciation for 20X5		$80,000	$100,000
Revaluation at Dec 31 20X4	$690,000
Revaluation loss charged to P&L -20X4	$10,000
New carrying value at Dec 31 20X4	$690,000
revaluation at Dec 31 20X5	$730,000
Difference in fair value	$40,000
Revaluation Gain credited to P&L -20X5	$10,000
Revaluation Gain credited to Revaluation reserve -20X5	$30,000
New carrying value at Dec 31 20X5	730,000
Note:
If a revaluation results in a decrease in the carrying amount of a fixed asset, recognize the decrease in profit or loss
If a revaluation results in an increase in the carrying amount of a fixed asset, recognize the increase in revaluation reserve
However, if the increase reverses a revaluation decrease for the same asset that had been previously recognized in profit or loss, recognize the revaluation gain in profit or loss to the extent of the previous loss (thereby erasing the loss). b) Journal entries 31 Dec 20X4 Depreciation A/c -Building $80,000 31 Dec 20X4 To Accumulated depreciation - Building $80,000 Being depreciation charged for the year 20X4 31 Dec 20X4 Depreciation A/c -Equipment $100,000 31 Dec 20X4 To Accumulated depreciation - Equipment $100,000 Being depreciation charged for the year 20X4 31 Dec 20X4 Gain/ Loss on revaluation A/c (P&L A/c) $10,000 31 Dec 20X4 To land A/c $10,000 Being revaluation loss charged to PL 31 Dec 20X5 Depreciation A/c -Building $80,000 31 Dec 20X5 To Accumulated depreciation - Building $80,000 Being depreciation charged for the year 20X5 31 Dec 20X5 Depreciation A/c -Equipment $100,000 31 Dec 20X5 To Accumulated depreciation - Equipment $100,000 Being depreciation charged for the year 20X5 31 Dec 20X5 Land A/c $10,000 31 Dec 20X5 To Gain/ Loss on revaluation A/c (P&L A/c) $10,000 Being revaluation gain to the extent of previous loss credited to P&L 31 Dec 20X5 Land A/c $30,000 31 Dec 20X5 To Revaluation reserve $30,000 Being revaluation gain in excess of the previous loss accumulated into revaluation reserve a/c