WORKBOOK

to accompany

COMPANY
ACCOUNTING 5E
by

Ken Leo and John Hoggett

© John Wiley & Sons Australia, Ltd 2001

Leo & Hoggett: Company Accounting in Australia, 5 th Edition

CHAPTER 12

REVALUATION AND IMPAIRMENT OF NON-CURRENT ASSETS

QUESTION 12.1

One of the classes of assets owned by Gandalf Ltd is vehicles which are measured at
fair value. At 1 July 2000, the vehicles consisted of:
Trucks: These were recorded at 1 July 2000 at $280 000. Their expected useful life
was 5 years.
Cars: These were recorded at 1 July 2000 at $180 000. Their expected useful life
was 6 years.

At 30 June 2001, the fair value of the trucks was estimated to be $204 000, and the fair
value of the cars at $164 000. The remaining useful lives were estimated to be 3 years
and 4 years respectively.

At 30 June 2002, the fair value of the trucks was calculated to be $140 000 and for cars,
$131 000.

REQUIRED

Prepare the journal entries in relation to the depreciation and revaluation of the cars and
trucks for the years ending 30 June 2001 and 30 June 2002.

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Leo & Hoggett: Company Accounting in Australia, 5 th Edition

QUESTION 12.2

Aragorn Ltd has 2 assets, Asset A and Asset B. They are in different classes. At 1 July
2000, information on the assets is as follows:

Asset A (at fair value) $100 000 (expected life: 5 years)

Asset B (at cost) $200 000
Accumulated Depreciation 50 000 150 000 (depreciated at 25% p.a.)

At 30 June 2001, Asset A’s fair value is assessed to be $87 000, and its remaining
useful life to be 3 years.

In August 2001, Aragorn Ltd transfers $3 900 from the asset revaluation reserve to
retained profits. At 31 December 2001, Asset B’s recoverable amount is assessed to be
$65 000, and the asset written down. Its remaining life is estimated to be 1 year. At 30
June 2002, Asset A’s fair value is estimated to be $55 000.

REQUIRED

Prepare the journal entries for the years ending 30 June 2001 and 30 June 2002 in
relation to Asset A and Asset B.

12.2
Leo & Hoggett: Company Accounting in Australia, 5 th Edition

QUESTION 12.3

Uhire Ltd rents limousines for parties and weddings, and trucks for moving furniture.
These assets are regarded as two separate classes of assets. Both assets are
measured at fair value.

At 1 July 2000, the balance sheet of Uhire Ltd was as follows:

Limousines $250 000

Trucks 780 000
Cash 30 000
Total Assets 1 060 000

Equity
Share capital 100 000
Retained profits 960 000
Total equity 1 060 000

The limousines had been acquired at a cost of $375 000 a number of years earlier.
They were revalued to $250 000 at 30 June 2000. In all prior years, the carrying amount
of the limousines had been approximately equal to fair value and no revaluation entry
was considered necessary. Their expected future life was estimated to be 5 years. The
tax base of the limousines at 30 June 2000 was $200 000.

The trucks were acquired for $1 000 000 and were revalued to $780 000 at 30 June
2000. As with the limousines, the carrying amounts in prior years were considered to be
approximately equal to fair value. Their expected future life at 30 June 2000 was 6
years. The tax base of the trucks at 30 June 2000 was $700 000.

At 30 June 2001, Uhire Ltd revalued the limousines to $220 000. The tax base of the
limousines at this date was $100 000. The trucks were written down to $600 000. Their
tax base was $520 000.

The financial statements of Uhire Ltd at 30 June 2001 including the current tax liability
was:

Profit and Loss Statement

for year ended 30 June 2001

Revenues $1 000 000

Expenses
Depreciation: Limousines $50 000
Depreciation: Trucks 130 000
Write-down: Trucks 50 000
Other expenses 350 000 580 000
Profit before income tax 420 000
Income tax expense 111 000
Net profit 309 000
Retained profits as at 1 July 2000 960 000
Retained profits as at 30 June 2001 1 269 000

12.3
Leo & Hoggett: Company Accounting in Australia, 5 th Edition

Balance Sheet
as at 30 June 2001

Assets
Limousines 220 000
Trucks 600 000
Cash 680 000
Total Assets 1 500 000
Liabilities
Current tax liability 111 000
Deferred tax liability __6 000
Total liabilities 117 000
Net Assets 1 383 000
Equity
Share capital 100 000
Retained profits 1 269 000
Asset revaluation reserve __14 000
Total equity 1 383 000

REQUIRED

1. Prepare the journal entries in Uhire Ltd for the year ending 30 June 2001 relating
to the non-current assets.
2. Prepare the tax-effect worksheet for the year ending 30 June 2001, and the
journal entry for the deferred tax.

12.4
Leo & Hoggett: Company Accounting in Australia, 5 th Edition

SOLUTION 12.1

Journal entries 2000-01

Depreciation Expense – Trucks Dr 56 000

Accumulated Depreciation – Trucks Cr 56 000
(Being annual depreciation –
1/5 x $280 000)

Depreciation Expense – Cars Dr 30 000

Accumulated Depreciation – Cars Cr 30 000
(Being annual depreciation –
1/6 x $180 000)

Accumulated Depreciation – Trucks Dr 56 000

Accumulated Depreciation – Cars Dr 30 000
Write-down Expense Dr 6 000
Trucks Cr 76 000
Cars Cr 16 000
(Being revaluation of assets to fair value)

Journal entries 2001-02

Depreciation Expense – Trucks Dr 68 000

Accumulated Depreciation – Trucks Cr 68 000
(Being annual depreciation –
1/3 x $204 000)

Depreciation Expense – Cars Dr 41 000

Accumulated Depreciation – Cars Cr 41 000
(Being annual depreciation –
1/6 x $164 000)

Accumulated Depreciation – Trucks Dr 68 000

Accumulated Depreciation – Cars Dr 41 000
Revenue – Reversal of Write-down Cr 6 000
Trucks Cr 64 000
Cars Cr 33 000
Deferred Tax Liability Cr 1 800
Asset Revaluation Reserve Cr 4 200
(Being revaluation of assets to fair value)

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Leo & Hoggett: Company Accounting in Australia, 5 th Edition

SOLUTION 12.2

Journal entries 2000-01

Depreciation Expense – Asset A Dr 20 000
Accumulated Depreciation – Asset A Cr 20 000
(Being depreciation of Asset A –
1/5 x $100 000)

Depreciation Expense – Asset B Dr 50 000

Accumulated Depreciation Cr 50 000
(Being depreciation Asset B –
1/4 x $200 000)

Accumulated Depreciation – Asset A Dr 20 000

Asset A Cr 13 000
Deferred Tax Liability Cr 2 100
Asset Revaluation Reserve Cr 4 900

Journal entries 2001-02

8/01
Asset Revaluation Reserve Dr 3 900
Retained Profits Cr 3 900
(Being transfer from asset revaluation reserve)

31//12/01
Depreciation Expense – Asset B Dr 25 000
Accumulated Depreciation Cr 25 000
(Being depreciation Asset B for ½year –
½x 1/4 x $200 000)

Accumulated Depreciation – Asset B Dr 125 000

Expense – Asset Write-down Dr 10 000
Asset B Cr 135 000
(Being write-down of asset to
recoverable amount)

31/12/02
Depreciation Expense – Asset B Dr 32 500
Accumulated Depreciation Cr 32 500
(Being depreciation for ½year –
½x 1 x $65 000)

Depreciation Expense – Asset A Dr 29 000

Accumulated Depreciation – Asset A Cr 29 000
(Being depreciation of Asset A –
1/3 x $87 000)

Accumulated Depreciation – Asset A Dr 29 000

Asset Revaluation Reserve * Dr 1 000
Deferred Tax Liability ** Dr 900
Expense *** Dr 1 100
Asset A Cr 32 000
(Being revaluation of Asset A to fair value)
* balance of account - $4 900 - $3 900
** 30% x ($58 000 - $55 000)
*** ($3 000 x 70%) less $1 000

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Leo & Hoggett: Company Accounting in Australia, 5 th Edition

SOLUTION 12.3

Limousines:

Balance at 30/6/00 $250 000

Depreciation – 1/5 50 000
200 000
Revaluation increment 20000
Fair value – 30/6/01 $220 000

Trucks

Balance at 30/6/00 $780 000

Depreciation – 1/6 130 000
650 000
Revaluation decrement 50 000
Fair value – 30/6/01 600 000

Current taxation liability

Revenues $1 000 000

Expenses for tax:
Depreciation: limos 100 000 ($200 000 –$100 000
Depreciation: trucks 180 000 ($720 000 - $520 000)
Other expenses 350 000
630 000
Taxable income $370 000
Current tax liability $111 000 (30% x $370 000)

JOURNAL ENTRIES

Depreciation Expense - Limos Dr 50 000

Accumulated Depreciation - Limos Cr 50 000
(Being depreciation of limos)

Depreciation Expense – Trucks Dr 130 000

Accumulated Depreciation - Trucks Cr 130 000
(Being depreciation of trucks)

Accumulated Depreciation – Limos Dr 50 000

Limousines Cr 30 000
Deferred Tax Liability Cr 6 000
Asset Revaluation Reserve Cr 14 000
(Being revaluation of limos to fair value)

Accumulated Depreciation – Trucks Dr 130 000

Write-down Expense Dr 50 000
Trucks Cr 180 000
(Being revaluation of trucks to fair value)

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Leo & Hoggett: Company Accounting in Australia, 5 th Edition

DEFERRED TAX JOURNAL ENTRY

Beginning balance of Deferred Tax Liability:

Temporary difference: limos [$250 000 - $200 000] $50 000

Trucks [$780 000 - $700 000] 80 000
130 000
Deferred tax liability – 30% x $130 000 $39 000

Tax-effect worksheet 30/6/01:

Carrying Assessable Deductible Tax base Temporary

amount amount amount differences
Limousines 220 000 220 000 100 000 100 000 120 000
Trucks 600 000 600 000 520 000 520 000 80 000
200 000
60 000
Beginning 39 000
balance
Movement 14 000
during year
Adjustment $7 000

The entry for deferred tax is:

Income Tax Expense Dr 7 000

Deferred Tax Liability Cr 7 000
(Being deferred taxation)

12.8