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

Requirement 1:- Prepare journal entries to account for the revaluation of the equipment of 30 June 2020. Show all working steps.

Date	Account Titles and Explanation	Debit	Credit
June 30, 2020	Equipment	$18,562
	Revaluation Surplus		$18,562

Calculation of Depreciation

Cost of Equipment on 1 July 2018 = $320,000

Useful life = 7 years

Residual value = $10,000

Depreciation = (Cost - Residual Value) / Useful Life

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

Depreciation = $44,286 for complete year

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

Book value of equipment on 30 June 2020 = $320,000 - $88,572 = $231,428

Fair value of Equipment on 30 June 2020 = $250,000

Upward Revaluation = 250,000 - 231,438

Upward Revaluation = $18,562

Requirement 2:- Prepare journal entries to account for the revaluation of the equipment of 30 June 2021. Show all working steps.

Date	Account Titles and Explanation	Debit	Credit
June 30, 2021	Impairment Loss	$30,000
	Equipment		$30,000
	Revaluation Surplus	$18,572
	Profit and Loss (30,000 - 18,572)	$11,428
	Impairment Loss		$30,000
	OR
	Revaluation Surplus	$18,572
	Profit and Loss	$11,428
	Impairment Loss		$30,000

Calculation of Impairment Loss

On July 1, 2020 Useful life of Equipment is reassessed to 6 years

Fair value of Equipment = $250,000

Depreciation = (250,000 - 10,000) / 6 = $40,000

Book value of Equipment on 30 June 2021 = $250,000 - $40,000 = $210,000

Fair value of Equipment on June 2021 = $180,000

Downward Revaluation = $210,000 - 180,000

Downward Revaluation = $30,000

Requirement 3:- Prepare journal entries to account for the sale of the equipment of 30 June 2022. Show all working steps

Date	Account Titles and Explanation	Debit	Credit
June 30, 2022	Cash	$200,000
	Equipment		$146,000
	Profit and Loss		$54,000

Calculation of Profit and sale of Equipment

Fair value of Equipment = $180,000

Depreciation = ($180,000 - 10,000) / 5 = $34,000

Book value of Equipment on 30 June 2022 = $180,000 - $34,000 = $146,000

Equipment sold on 30 June 2022 = $200,000

Profit on Sale of Equipment = $200,000 - $146,000 = $54,000

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