Question

On 1 July 2018, ABC Ltd purchased and recorded equipment at its cost of acquisition of $320 000. The equipment is expected to have a useful life for seven years and an estimated residual value of $10 000. ABC Ltd depreciates the asset using the straight-line method. ABC Ltd uses the revaluation model to equipment and records accumulated depreciation using the net method. The reporting period end of ABC Ltd is 30 June. ABC Ltd revalued the equipment on 30 June 2020, when the fair value of the equipment was $250 000. On 1 July 2020, the useful life of the equipment is reassessed: it is expected to have a remaining useful life of 6 years. The estimated residual value remains unchanged. ABC Ltd revalued the equipment on 30 June 2021, when the fair value of the equipment was $180 000. On 30 June 2022 the equipment was sold for $200 000. REQUIRED: (1) Prepare journal entries to account for the revaluation of the equipment of 30 June 2020. Show all working steps. (2) Prepare journal entries to account for the revaluation of the equipment of 30 June 2021. Show all working steps. (3) Prepare journal entries to account for the sale of the equipment of 30 June 2022. Show all working steps.

Answer 1

Original cost of equipment on July 1, 2018 = $320,000

Estimated residual value = $10,000

Estimated useful life = 7 years

So, annual depreciation under straight line method = (Cost – Residual value)/useful life

= ($320,000 - $10,000) / 7

= $44,285.71

Ans.1.

Now, revaluation of equipment on June 30,2020 (2 years later) reveals fair value = $250,000

Carrying value of equipment as on June 30,2020 = $320,000 – ($44,285.71 * 2) (Since, depreciation for 2 years since acquisition = $44,285.71 annual depreciation * 2 years)

So, carrying value as on June 30,2020 = $231,428.60

So, there is a revaluation gain due to increase in fair value of equipment = $250,000 - $231,428.60

= $18,571.43

Same will be credited to Revaluation Surplus account

The journal entry will be as follows:

Date	Particulars	Debit amount	Credit amount
30 June,2020	Equipment	$18,571.43
	Revaluation Surplus		$18,571.43
	(Being equipment revalued and gain credited to revaluation surplus)

Ans.2.

Now, on July 1, 2020, revalued value of asset = $250,000

Remaining useful life = 6 years and estimated residual value remains unchanged at $10,000

So, new annual depreciation = ($250,000 - $10,000) / 6

= $40,000

Now, on June 30,2021 (1 year later), equipment is revalued with fair value = $180,000

Carrying value on June 30,2021 = $250,000 - $40,000 (1 year’s depreciation)

= $210,000

However, fair value = $180,000 (less than carrying value)

So, there is an impairment loss = $210,000 - $180,000 = $30,000

The impairment loss is first recovered from Revaluation Surplus of previous years and if loss exceeds revaluation surplus, the balance is recorded as impairment loss in income statement.

So, the journal entry to record this revaluation will be

Date	Particulars	Debit amount	Credit amount
30 June,2021	Revaluation Surplus	$18,571.43
	Impairment loss	$11,428.57
	Equipment		$18,571
	Accumulated impairment loss		$11,428.57
	(Being equipment revalued)

Ans.3.

Now, carrying value as on July 1, 2021 = $180,000

Further, remaining useful life = 5 years

Residual value = $10,000

So, new annual depreciation = ($180,000 - $10,000) / 5

= $34,000

One year later, on June 30,2022, carrying value of equipment = $180,000 - $34,000 = $146,000

Equipment sold for $200,000

So, it is sold at a profit of $200,000 - $146,000 = $54,000

Journal entry to record same will be:

Date	Particulars	Debit amount	Credit amount
30 June,2022	Cash	$200,000.00
	Accumulated depreciation	$34,000.00
	Equipment		$180,000
	Gain on sale of equipment		$54,000.00
	(Being equipment sold at profit)