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On 30 June 2016, the statement of financial position of Miss Congeniality Ltd showed the
following non-current assets after charging depreciation:
The company has adopted fair value for the valuation of non-current assets. This has resulted
in the recognition in previous periods of an asset revaluation surplus for the building of $14 000.
On 30 June 2016, an independent valuer assessed the fair value of the building to be $160 000
and the vehicle to be $90 000. The income tax rate is 30%.
Required
A. Prepare any necessary entries to revalue the building and the vehicle as at 30 June 2016.
B. Assume that the building and vehicle had remaining useful lives of 25 years and 4 years
respectively, with zero residual value. Prepare entries to record depreciation expense for the
year ended 30 June 2017 using the straight-line method.
A.
*NOTE: there is an amount of $14 000 in the asset revaluation surplus (ARS) account for building
from previous periods. This would have been recognised from net revaluation gains to the building
and can therefore be decreased with any revaluation losses on building before those losses are
required to be recognised directly in the P&L. The amount in the ARS account is net of tax.
Therefore, the full amount of previous revaluation gains for the buildings would have been $20 000
($14 000 / 0.7). The tax amount would be recognised in the Deferred Tax Liability account for $6 000.
30 June 2016
Building Cr 40 000
Vehicle Cr 40 000
Vehicle Dr 10 000
B.
30 June 2017
($160 000/25)
($90 000/ 4)
In the 30 June 2016 annual report of Payback Ltd, the equipment was reported as follows:
PAYBACK LTD
Machine A Machine B
Machine A Dr 15 000
Gain on revaluation of machinery (OCI) Cr 15 000
(Revaluation of asset)
(Tax-effect of revaluation)
Machine B Cr 40 000
Machine B Cr 5 000
to $155 000)
30 June 2017
Machine A $ Machine B $
Machine A Cr 15 000
Machine A Cr 2 000
(Revaluation downwards)
Cr 2 000
to revaluation decrement)
Machine B Cr 15 500
Machine B Cr 3 000
Discuss the cost basis method and the fair value method in relation to the relevance and reliability of
information.
Current information is generally more relevant than past information. Determination of cost is
generally more reliable than determination of fair value.
Discuss the trade-off between relevance and reliability, that is, as information becomes less reliable it
also loses its relevance. A fair value measure may, because of its timeliness, be more relevant but if
the measure becomes more unreliable, the relevance of the information decreases.
Optional Question
Question 9.2 Application of revaluation model
They are in different classes of non-current assets and are to be measured at fair value. The
expected useful lives of vehicles and equipment are 5 years and 10 years, respectively.
At 30 June 2015, the fair values of both assets were assessed. The equipment had a fair value
of $82 000, and the vehicles, $70 000. The remaining useful lives were assessed to be 8 years for
equipment and 7 years for vehicles.
At 30 June 2016, the fair value of equipment was assessed to be $81 750 and the fair value of
vehicles was $55 000.
Required
Prepare the journal entries for Twister Ltd for the years ending 30 June 2015 and 2016.
Twister Ltd
General Journal
30 June 2015
Equipment Cr 10 000
Equipment Cr 8 000
Vehicles Cr 16 000
Vehicles Dr 6 000
30 June 2016
Equipment Cr 10 250
Equipment Dr 10 000
Vehicles Cr 10 000
of $60 000)
Vehicles Cr 5 000