Question

Question 4

Samdisk Ltd owns a property which was purchased on 1 January 2015 for $5,000,000, of which $1,000,000 was considered

to relate to the land on which the building is situated. The company has followed a policy of depreciating the buildings at the

rate of 5 percent on cost per annum. On 31 December 2017, the property was valued by a firm of chartered surveyors at

$4,000,000 of which $1,200,000 was considered attributable to the value of the land. The valuers further estimated that the

property possessed a remaining useful life of 30 years from 1 January 2018.

Required:

a Prepare journal entries with narratives for recording the relevant transactions for the year ended 31 December 2017 for this property.   

b Prepare journal entries with narratives for recording the depreciation charges for this property.

c Show the details relating to the property which would appear in the statement of financial position and statement of profit or loss on 31 December 2017 and 31 December 2018.

Answer 1

Answer
Date	Journal Entries	Debit	Credit
1-Jan-15	Land	1,000,000.00
	Building	4,000,000.00
	To Cash/Bank		5,000,000.00
	(Being Purchase of Land and Building)
	Part b
31/12/2015	Depreciation on Building- P/L	200,000.00
	(4,000,000 * 5%)
	To Building		200,000.00
	(Being depreciation for building year 1 at 5 %
31/12/2016	Depreciation on Building- P/L	200,000.00
	(4,000,000 * 5%)
	To Building		200,000.00
	(Being depreciation for building year 2 at 5 %)
	Note - the question says 5% on cost so it is assumed to be on Straight Line
	Part a
	31st December 2017
31/12/2017	Land	200,000.00
	To Revaluation Surplus on Land		200,000.00
	(Being revaluation surplus from land valuation)
	(1,200,000-1,000,000)
	A gairecognizeduation is always recognised in equity, under a revaluation reserve (unless the gain reverse’s revaluation losses on the same asset that were previously recognised in the income statement – in this instance the gain is to be shown in the income statement).
	The Building value as on 31-12-2017 is 4 mio - 200k +200k depreciation, i.e. 3.6 mio As per new valuation report the value is only 2.8 mio (4 mio-1.2mio of land). Therefore the building is having an impairment loss of 800k
31/12/2017	Impairment loss on Building (P/L)	800,000.00
	To Building		800,000.00
	(Being impairment loss on revaluation of Building)
	(Note only revaluation surplus of same assets can be adjusted)
	Depreciation
	Building as on 31-12-2017	3,600,000.00
	Depreciation for 31-12-2017	(200,000.00)
	Less impairment loss	(600,000.00)
	Value	2,800,000.00
	Remaining Life of the asset on 1-1-2018	30 years
	Depreciation on Straight Line basis	2,800,000 / 30
	Revised depreciation	93,333.33
31/12/2017	Depreciation on Building- P/L	200,000.00
	To Building		200,000.00
	(Being depreciation for building)
31/12/2018	Depreciation on Building- P/L	93,333.33
	To Building		93,333.33
	(Being revised depreciation for building)

Part C

31-12-2017
Extract of Profit and loss	Amount
Expense
Impairment loss on building	600,000.00
Depreciation on Building	200,000.00

Extract of Balance Sheet on 31-12-2017
Liability	Amount	Asset	Amount
Reserves
Revaluation Surplus on Land	200,000.00	Land	1,000,000.00
		Add: Revaluation Surplus	200,000.00
			1,200,000.00
		Building	3,600,000.00
		Less : Depreciation	(200,000.00)
		Less : impairment loss	(600,000.00)
			2,800,000.00

31-12-2018
Extract of Profit and loss 31-12-2018
Expense	Amount
Depreciation on Building	93,333.33

Extract of Balance Sheet on 31-12-2018
Liability	Amount	Asset	Amount
Reseves
Revaluation Surplus on Land	200,000.00	Land	1,200,000.00
		Building	2,800,000.00
		Less : Depreciation	(93,333.33)
			2,706,666.67