Tute 4 - Acctg for PPE - Accounting for property, plant and equipment. PDF

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Accounting for property, plant and equipment. ...

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ACCG224

Intermediate Financial Accounting

S1, 2018

ACCG224/ACCG612 Tutorial Classes Week 4 Accounting for PPE Sampl e Solutio ns WA RNING: Mem or ising t he se solutio ns will not help you for the class test and the final exam where we expect re spo ns e s in your own words showing your co nceptual understanding and your ab ility to c ritically a na lyse the issues we are discussing. The solutions a re onl y a gui deline showing if you a re on th e rig ht t ra ck and if you have though t o f all t he point s to be discuss ed.

Practice Question 9.2 Twister Ltd General Journal 30 June 2015 Depreciation expense – equipment

Dr

10 000

Accumulated depreciation – equipment Cr

10 000

(Depreciation – $100 000 / 10 years)

Accumulated depreciation - equipment Equipment

Dr

10 000

Cr

10 000

(Write down of equipment to carrying amount: $90 000)

Revaluation Loss on equipment (P/L) Equipment

Dr

8 000

Cr

8 000

(Revaluation from carrying amount to fair value: $90 000 to $82 000)

Depreciation expense – vehicles

Dr

16 000

ACCG224

Intermediate Financial Accounting

Accumulated depreciation – vehicles

Cr

S1, 2018

16 000

(Depreciation – 20% x $80 000) Accumulated depreciation – vehicles Vehicles

Dr

16 000

Cr

16 000

(Write-down to carrying amount: $64 000)

Vehicles Gain on revaluation of vehicles (OCI)

Dr

6 000

Cr

6 000

(Revaluation increment: $64 000 to $70 000)

Income tax expense (OCI)

Dr

Deferred tax liability

Cr

1 800 1 800

(Tax effect of revaluation increment)

Gain on revaluation of vehicles (OCI)

Dr

6 000

Income tax expense (OCI)

Cr

1 800

Asset revaluation surplus - vehicles

Cr

4 200

(Accumulation of net revaluation gain in equity)

30 June 2016 Depreciation Expense – Equipment

Dr

10 250

Accumulated depreciation – Equipment Cr

10 250

(Depreciation – $82 000 / 8years)

Accumulated depreciation - Equipment Equipment

Dr Cr

10 250 10 250

ACCG224

Intermediate Financial Accounting

S1, 2018

(Write down from previous FV $82 000 to carrying amount $71 750)

Equipment

Dr

10 000

Gain on revaluation of equipment (P/L) Cr

8 000

Gain on revaluation of equipment (OCI) Cr

2 000

(Revaluation of equipment from $71 750 to $81 750, with prior revaluation write-down of $8 000)

Income tax expense (OCI)

Dr

Deferred tax liability

Cr

600 600

(Tax effect of revaluation gain)

Gain on revaluation of equipment (OCI)

Dr

2 000

Income tax expense (OCI)

Cr

600

Asset revaluation surplus

Cr

1 400

(Accumulation of revaluation gain in equity)

Depreciation expense – vehicles Accumulated Depreciation – vehicles

Dr

10 000

Cr

10 000

(Being depreciation – $70 000 / 7 years)

Accumulated depreciation – vehicles Vehicles (Write down of vehicles to carrying amount of $60 000)

Dr Cr

10 000 10 000

ACCG224

Intermediate Financial Accounting

Loss on revaluation of vehicles (OCI) Vehicles

Dr

S1, 2018

5 000

Cr

5 000

(Write down to fair value: $60 000 to $55 000)

Deferred tax liability Income tax expense (OCI)

Dr

1 500

Cr

1 500

(Tax effect of write down to fair value)

Asset revaluation surplus

Dr

3 500

Income tax expense (OCI)

Dr

1 500

Loss on revaluation of vehicles (OCI) (Reduction in accumulated equity due to revaluation decrement on vehicles)

Cr

5 000

ACCG224

Intermediate Financial Accounting

S1, 2018

Practice Question 9.4 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 Accumulated depreciation – Building

Dr

Building

100 000

Cr

100 000

(Writing down to carrying amount)

Loss on revaluation of building (P&L)

Dr

20 000

Loss on revaluation of building (OCI)

Dr

20 000

Building

Cr

40 000

(Revaluation downwards of building - *Note)

Deferred tax liability Income tax expense (OCI)

Dr

6 000

Cr

6 000

(Tax-effect of revaluation decrement on previously revalued asset - *Note)

Asset revaluation surplus - Building

Dr

14 000

ACCG224

Intermediate Financial Accounting

Income tax expense (OCI)

Dr

S1, 2018

6 000

Loss on revaluation of building (OCI) Cr

20 000

(Reduction in accumulated equity due to revaluation decrement on building - *Note)

Accumulated depreciation – Vehicle Vehicle

Dr

40 000

Cr

40 000

(Writing down to carrying amount)

Vehicle Gain on revaluation of vehicle (OCI)

Dr

10 000

Cr

10 000

(Revaluation to fair value)

Income tax expense (OCI) Deferred tax liability

Dr

3 000

Cr

3 000

(Tax-effect of revaluation increment)

Gain on revaluation of vehicle (OCI)

Dr

10 000

Income tax expense (OCI)

Cr

3 000

Asset revaluation surplus - vehicle

Cr

7 000

B. 30 June 2017 Depreciation expense – Building

Dr

Accumulated depreciation – Building Cr ($160 000/25)

6 400 6 400

ACCG224

Intermediate Financial Accounting

Depreciation expense – Vehicle Accumulated depreciation – Vehicle

Dr

S1, 2018

22 500

Cr

22 500

($90 000/ 4)

Question 9.5

Revaluation of assets

In the 30 June 2016 annual report of Payback Ltd, the equipment was reported as follows: Equipment (at cost) Accumulated Depreciation

$

500 000 (150 000) 350 000

The equipment consisted of two machines, Machine A and Machine B. Machine A had cost $300 000 and had a carrying amount of $180 000 at 30 June 2016, and Machine B had cost $200 000 and was carried at $170 000. Both machines are measured using the cost model, and depreciated on a straight-line basis over a 10-year period. On 31 December 2016, the directors of Payback Ltd decided to change the basis of measuring the equipment from the cost model to the revaluation model. Machine A was revalued to $180 000 with an expected useful life of 6 years, and Machine B was revalued to $155 000 with an expected useful life of 5 years. At 30 June 2017, Machine A was assessed to have a fair value of $163 000 with an expected useful life of 5 years, and Machine B’s fair value was $136 500 with an expected useful life of 4 years. The tax rate is 30%. Required A. Prepare the journal entries during the period 1 July 2016 to 30 June 2017 in relation to the equipment. B. According to accounting standards, on what basis may management change the method of asset measurement, for example from cost to fair value?

ACCG224

Intermediate Financial Accounting

S1, 2018

PAYBACK LTD

31 December 2016 – Change from cost model to revaluation model Depreciation expense – Machine A Accumulated depreciation

Dr

15 000

Cr

15 000

(1/2 x 10% x $300 000)

Depreciation expense – Machine B Accumulated depreciation

Dr

10 000

Cr

10 000

(1/2 x 10% x $200 000)

Machine A

Machine B

Cost

300 000

Cost

200 000

Accum depn

135 000

Accum depn

40 000

165 000

160 000

Fair value

180 000

Fair value

Increment

15 000

Decrement

Accumulated depreciation – Machine A Machine A

Dr

155 000 5 000

135 000

Cr

135 000

(Writing the asset down to carrying amount)

Machine A Gain on revaluation of machinery (OCI)

Dr

15 000

Cr

15 000

(Revaluation of asset)

Income tax expense – gain on revaluation of asset (OCI)

Dr

4 500

ACCG224

Intermediate Financial Accounting

Deferred tax liability

S1, 2018

Cr

4 500

(Tax-effect of revaluation)

Gain on revaluation of machinery (OCI)

Dr

15 000

Income tax expense (OCI)

Cr

4 500

Asset revaluation surplus – Machine A

Cr

10 500

(Accumulation of net revaluation gain in equity)

Accumulated depreciation – Machine B

Dr

Machine B

40 000

Cr

40 000

(Writing the asset down to carrying amount)

Loss – revaluation decrement (P/L)

Dr

Machine B

5 000

Cr

5 000

(Revaluation of machine from $200 000 to $155 000)

30 June 2017 Depreciation expense – Machine A

Dr

Accumulated depreciation

15 000

Cr

15 000

(1/6 x ½ x $180 000)

Depreciation expense – Machine B

Dr

Accumulated depreciation

15 500

Cr

15 500

(1/5 x ½ x $155 000)

Machine A

$

Machine B

$

Carrying amount

165 000

Carrying amount

139 500

Fair value

163 000

Fair value

136 500

Decrement

2 000

Decrement

3 000

ACCG224

Intermediate Financial Accounting

Accumulated depreciation – Machine A Machine A

Dr

S1, 2018

15 000

Cr

15 000

(Writing down to carrying amount)

Loss on revaluation of machinery (OCI) Machine A

Dr

2 000

Cr

2 000

(Revaluation downwards)

Deferred tax liability Income tax expense (OCI)

Dr

600

Cr

600

(Tax-effect of revaluation decrement on asset previously revalued upwards)

Asset revaluation surplus – Machine A

Dr

1 400

Income tax expense (OCI)

Dr

600

Loss on revaluation of machinery (OCI) Cr

2 000

(Reduction in accumulated equity due to revaluation decrement)

Accumulated depreciation – Machine B Machine B

Dr

15 500

Cr

15 500

(Writing down to carrying amount)

Loss – revaluation decrement (P/L) Machine B (Writing down to fair value)

Dr Cr

3 000 3 000

ACCG224

Intermediate Financial Accounting

S1, 2018

B: Basis for change in accounting policy

Refer to AASB 8 paragraph 9.

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.

ACCG224

Intermediate Financial Accounting

S1, 2018...