Question

Question 4 [16 marks]

Revaluation of property, plant and equipment

You are the accountant for Superstar Ltd, and you are required to account for the company’s equipment for the years ended 30 June 2017 and 30 June 2018, which are measured using the revaluation model. The directors elect to depreciate equipment on a straight-line basis.

Equipment 1:

The first equipment has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:

Revalued amount (as at 30 June 2016): $60,000 Less: accumulated depreciation    - Carrying amount $60,000

$60,000

This equipment was revalued for the first time on 30 June 2016, from $70,000 to $60,000. The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $10,000.

The directors have determined that the fair value of this equipment on 30 June 2017 is $55,000. At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value remains unchanged at $10,000.

The directors have determined that the fair value of this equipment on 30 June 2018 is $44,000.

Equipment 2:

The second equipment at has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:

Revalued amount (as at 30 June 2016): $20,000 Less: accumulated depreciation    - Carrying amount $20,000
	$20,000

  

This equipment has been revalued a number of times, with revaluation decrements amounting to $1,000 being previously recognised in profit or loss. The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $4,000.

The directors have determined that the fair value of this equipment on 30 June 2017 is $18,000. At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value has been revised to $6,000.

This equipment is sold on 31 December 2017 for $13,000.

Required:

Prepare the necessary journal entries to account for each of the above equipment for the years ended 30 June 2017 and 30 June 2018 (including entries for depreciation, revaluations, and any disposals). Show all relevant workings. Note: you are not required to account for income tax associated with revaluations.

Answer 1

Equipment 1:

For 30 June 2017

Carrying Amount is $60000

Calculating Depreciation (Straight Line Method):

$60000 - $10000 (Residual Value) = $50000

The equipment can be used for 4 more years, so, $50000/4yrs = $12500 per year

Journal Entry:

First of all we will do the depreciation entry:

Depreciation A/c Dr. $12500

     To Equipment 1 A/c Cr. $12500

So the Decpreciated Value as on 30 June 2017 is $60000 - $12500 = $47500

According to the Accounting Standard:

If the asset's carrying amount is increased as a result of revaluation (upword), the increase shall be recognized in Other Comprehensive Income and accumulated in the equity under the heading of Revaluation Surplus.However, the increase shall be recognised in the Profit & Loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in Profit & Loss. (Not referring to class of asset)

If the asset's carrying amount is decreased as a result of revaluation, the decrease shall be recognized in Profit & Loss. However, the decrease shall be recognized in other comprehensive income to the extent any credit balance lying in Revaluation Surplus relaated to the same asset.

Note: When the 1st revaluation was done, from $70000 to $60000, the question does not indicate that there was any difference between the Depreciated value(i.e Carrying value as on 30 June 2015 - Depreciation for that year) and the Revalued amount, or the difference was charged to the Profit & Loss A/c

So, we will directly credit the Current Year difference to Revaluation Surplus.

Fair Value (Revalued) as on 30 June 2017 is $55000.

Difference = $55000 - $47500 (Depreciated Value) = $7500 This is for what we have to pass the entries:

Equipment 1 A/c Dr. $7500

      To Revaluation Surplus Cr. $7500

(To record the increment in the asset value as per the Prudence Concept)

For June 2018:

Calculation of depreciation:

Carrying value on 30 June 2017 = $55000 - $10000 (Residual Value) = $45000/3 years life = $15000

Journal Entries:

Depreciation A/c Dr. $15000

     To Equipment 1 A/c Cr. $15000

(For recording depreciation)

Depreciated Value of the asset: $55000 - $15000 = $45000

Fair Value (Revalued) as on 30 June 2018 is $44000

Difference to be adjusted: $45000 - $44000 = $1000 to be debited to the Revaluation Surplus as we have earlier made an increasing revaluaton and credited the Revaluation Surplus, so we will reverse it to the amount of difference.

Revaluation Surplus Dr.   $1000

    To Equipment 1 Cr.                    $1000

(This way decreasing the value of asset against the revaluation surplus)

Equipment 2:

For 30 June 2017

Calculating Depreciation:

$20000 (Carrying Value) - $4000 (Residual Amount) = $16000/4 years estimated life = $4000

Journal Entry:

Depreciation A/c Dr. $4000

     To Equipment 2 A/c Cr. $4000

So the Depreciated Value as on 30 June 2017 is $20000 - $4000 = $16000

Fair Value (Revalued) on 30 June 2017 is $18000

Difference: $18000 - $16000 = $2000 (Increment) which is to be adjusted.

Note: Here, the asset was revalued multiple times and decrements amounting to $1000 being previosly recognized in Profit & Loss A/c. we shall reverse it upto $1000 and rest shall be credited to revaluation surplus.

Equipment 2 Dr. $2000

       To Profit & Loss A/c. Cr. $1000

       To Revaluation Surplus Cr. $1000

(Being increment in the value of asset adjusted)

For 31 December 2017:

Calculating Depreciation:

$18000 - $6000 (Revised residual value) = $12000/3 years life = $4000 x 6months/12months As it has been sold on 31 December 2017 = $2000.

Depreciation A/c Dr. $2000

     To Equipment 2 A/c Cr. $2000

So, the depreciated value on 30 June 2018 is $18000 - $2000 = $16000

Difference: $16000 - $13000 = $3000

Asset Sold for $13000, its entry shall be

Cash/Bank A/c Dr. $13000

Revaluation Surplus Dr. $1000

Profit & Loss A/c. Dr. $2000

            To Equipment 2 Cr. $16000

(Sale of the equipment recorded, and as there is loss the Revaluation Surplus shall be reversed to the extent of credit balance and rest be charged to P&L A/c.)

If there is gain on sale of revalued (increment) asset, the balance of revaluation surplus shall be credited to Profit & Loss A/c and rest if any shall be directly credited to the same.

Hope you understood the concept and the answer. If there is any doubt, please comment.