Question

Question 1 Topic: Property, plant and equipment.

Answer both parts independently of each other.

PART A 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.

PART B

ABC Ltd acquired a machine for $750 000 on 1 July 2018. The machine had a useful life of five years and was depreciated on a straight-line basis with no disposal value. ABC Ltd adopts the cost model for accounting for assets in this class. ABC Ltd makes the following estimates of the value of the machine: Date Net selling price Value in use Fair Value 30 June 2019 $550 000 520 000 590 000 30 June 2020 $460 000 420 000 490 000 Indicators of impairment were identified on 30 June 2019, while indicators of a reversal of impairment were found on 30 June 2020.

REQUIRED: Prepare journal entries relating to this asset from 30 June 2019 to 30 June 2020. Show the steps of impairment (or reversal of impairment) tests. Show all working (step by step)

Answer 1

Answer-

Cost of equipment =$320,000

Useful life= 7 years

Residual value= $10,000

Depreciation p.a.= $320,000-$10,000/ 7 years

=$44,286 p.a.

Depreciation upto 30 June 2020:-

=$44,286 *2 years= $88,572

Book value as on June 30,2020:-

=$320,000-$88,572

= $231,428

But it was revalued at $250,000

Upward revaluation= $250,000-$231,428

=$18,572

1-Journal entry as on 30 June, 2020:-

Date	Account Title and Explanation	Debit	Credit
	Equipment	$18,572
	Revaluation Surplus		$18,572

2-On July 1,2020, useful life is reassessed to 6 years

Depreciation p.a.=$250,000-$10,000/ 6 years

=$40,000

Book value as on 30 June 2021

=$250,000-$40,000

=$210,000

But fair value on revaluation= $180,000

Downward revaluation= $210,000-$180,000

=$30,000

Entry on 30 June 2021

  

Date	Account Title and Explanation	Debit	Credit
1-	Revaluation surplus	$18,572
	Profit and Loss	$11,428
	Equipment		$30,000
	OR
1-	Impairment loss	$30,000
	Equipment		$30,000
2-	Revaluation surplus	$18,572
	Profit and Loss	$11,428
	Impairment loss		$30,000

3-Depreciation for 2022:-

=$180,000-$10,000 / 5 years

=$34,000

Book value as on 30 June 2022 =$180,000-$34,000

=$146,000

Sold for $200,000

Profit on sale= $200,000-$146,000

=$54,000

Journal Entry:-

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	$200,000
	Equipment		$146,000
	Profit and Loss		$54,000

2-

Calcuation of depreciation

(Value of asset- scrap value)/ estimated life of asset	($750000-0)/5
Depreciation for the year 2019	150000

book value of asset as 30 june,2019	Cost of asset- depreciation
	$750000-$150000
	$600,000

Recoverable value will be the higher of fair value less cost to sale and value in use

fair value

value in use

so recoverable value will be 590000

Impairment loss is the difference between the book value and recoverable value

so the impairment loss= $600000-$590000

= $10000

Journal entry for the year for 30 th june 2019

	dr	cr
Impairment loss	10000
Machinery		10000

Now the book value of the machinery as on 30th june 2019 is 590000

depreciation for the year 2020 will be = Book value as on 30th june2019/ remaining estimated life

= $590000/4

=$147500

so the book value of machinery as 30 june 2020 = Book value as on 30th june2019- depreciation

= $590000-$147500

= $442500

Recoverable value will be the higher of fair value less cost to sale and value in use

Fair value =$490000

Value in use= $42000

So the recoverable value is $ 490000

As the recoverable value is more than book value the impairment loss recorded earlier should be reversed but the value of the asset should not be more than in the case if no impairment has been recorded

Value of the asset if there is no impairment loss=

cost of assets- dep. for two years

= 750000- (2*150000)

= $ 450000

so the impairment loss of $ 7500 i.e ($450000-$442500)will be reversed

the journal entry will be

Machinery	$7,500
Impairment loss		$7,500

Hence the value of machinery as on 30 th june 2020 will be $450000