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1.How is the carrying value of an item of Property, Plant and Equipment determined under the cost model?

2.Describe the fair value of an asset.

3.Valdivia Company owns a piece of equipment which cost \$55 000 on 1 July 2015. At that date, the asset has a useful life of 5 years and a residual value of \$5 000 after the 5 years. On 1 July 2018, the equipment is revalued to \$16 000 with a remaining useful life of two years and no residual value. The accountant recorded the following journal entries on 1 July 2018:

 1 July 2018 Debit Credit (a) Equipment 33 000 Accumulated depreciation 33 000 (To reverse accumulated depreciation up to 30 June 2018) (\$55 000 / 5 = \$11 000 per annum) (b) Depreciation 8 000 Revaluation decrement (Statement of comprehensive income) 6 000 Accumulated depreciation 14 000 (To record the revaluation decrement and depreciation on the revalued amount)

Required:

Discuss whether these journals are correct and if not, what errors the accountant made in recording them. Justify your answer and show calculations as part of your argument. (Note: do not restate the journals but provide your answer in narrative statements).

4.Now, assume that Valdivia Company revalued the equipment again on 1 July 2019 at a value of \$13 000, with one year remaining useful life and \$3 000 residual value.

Required:

• Provide the journal entry to record the revaluation on 1 July 2019. Show your calculations.
• Provide the journal entry to record the depreciation on 30 June 2020.

5.Puerto Ltd owns a plant with a cost of \$300 000 and carrying amount of \$240 000 at 30 June 2017. The depreciation rate is 10% straight line and zero residual value. On 1 July 2017, the value in use is determined as \$225 000 and the fair value less disposal cost as \$210 000. The accountant recorded the following journal entry to recognise an impairment loss on 1 July 2017:

Dr. Impairment loss \$30 000

Cr. Accumulated depreciation \$30 000

Required:

• Discuss whether this journal is correct and if not, what errors the accountant made in recording the journal. Justify your answer and show calculations as part of your argument. (Note: do not restate the journal but provide your answer in narrative statements).

(b)  Provide the correct journal entry on 1 July 2017 to record the impairment loss.

(c)  Provide the journal entry that will be required on 30 June 2018.

6.Now, assume that Puerto Ltd revalued the plant on 1 July 2018 at a value of \$240 000, and that there are no changes in the depreciation rate and residual value.

Required:

Provide the journal entry to record the revaluation on 1 July 2018. Show your calculations.

## IAS 16 Compliance for Carrying Value Determination

1.The determination of carrying amount of Property, Plant and Equipment needs to be in compliance with IAS 16 which deals with Property, Plants and Equipment. As per the provisions which are stated in IAS 16.43, in case the business uses cost model, each part of the property, plant and equipment with a cost which is considered to be significant in relation to the total cost of the asset must be depreciated in a separate manner (André, Filip and Paugam 2015). The carrying amount of an item of property, plant and equipment will be including the cost of replacement for parts of the item depending on the recognition criteria. In addition to this, the standard also provides cost of major inspections should also be recognised in the carrying amount of the item of property, plant and equipment (Trifan and Anton 2014).

2.Fair Value can be described as the sale price at the buyers are willing to purchase the asset and the sellers are also willing to sell the assets and it is assumed that the buyers and sellers for the asset have adequate knowledge of the market conditions of the business (Blankespoor et al. 2013). Fair value also represents the value of the assets and liabilities of a business in case of consolidation of financial statements of the company. In accounting practice and principle, fair value accounting is considered to be a valuation concept and the same is implemented by FASB (Magnan, Menini and Parbonetti 2015). In accounting terms, fair value is used as a certainty of the market value of an asset. As per US GAAP, fair value is the price at which the assets are purchased or sold in an orderly fashion between participants of the transaction. When a business is measuring fair value of an asset, assumption is made that the pricing of the asset and liabilities are under current market conditions and also considers the risks which is associated with the asset. As per the provision which is provided by IFRS 13, an entity is required to consider the effects of credit risk while determining fair value measurement. The concept of fair value measurement is very important in accounting process and measuring the value of the assets and liabilities of the business.

Depreciation p.a. on Equipment:

[Cost of Equipment – Residual Value] / Estimated Life

= [ \$55,000 - \$5,000] / 5 yrs.

= \$ 10,000

Accumulated Depreciation from 1 July 2015 to 1 July 2018:

## Definition and Importance of Fair Value in Accounting

Depreciation p.a. on Equipment x Nos. of Useful Years

= \$ 10,000 x 3 yrs.

= \$ 30,000

Gain / (Loss) on Impairment:

Revalued Cost of Equipment - [ Cost of Equipment – Accumulated Depreciation]

= \$ 16,000 – [\$ 55,000 - \$ 30,000]

= \$ 16.000 - \$ 25,000

= - \$ 9,000 (Loss on Impairment)

The accounting treatment for computation of depreciable amount for the equipment is wrongly treated by the accountant of the business. The first journal entry shows that equipment account is debited and accumulated depreciation account is credited. Firstly, the amount which is shown is wrong which is shown to be \$ 33,000. The accountant has just divided the value of the equipment with the estimated useful life of the asset. The accountant has not considered the residual value of the asset which is to be deducted from the original value of the asset in order to compute depreciation of the about. As shown in the above the accurate computation of depreciation is shown to be \$ 10,000. The accountant had computed the same to be \$ 11,000 as shown in the question. In addition to this, the entry for charging depreciation in a business has also been passed wrongly (Sooriyakumaran and Thirunavukkarasu 2013). The accountant has debited Equipment account and credited Accumulated depreciation which is wrong as depreciation is a charge on the asset and therefore, the equipment account should be credited in order to reduce the value of the asset (Barbe, Didelot and Ashta 2014).

The entry which is passed for recording the revaluation decrement or impairment of assets is also wrong both in terms of figure and the passing of journal entry. The accountant has computed the loss from impairments of asset to be \$ 6000 which is not the correct figure. The accurate calculation of revaluation decrement is shown in the above para where the loss from impairment is computed to be \$ 9,000. The accountant has wrongly merged depreciation charge with impairment loss for the equipment. Depreciation is annual charge on the value of the asset due to wear and tear or other factors (Jaijairam 2013(. Whereas impairment of an asset takes place when the market value of the asset is less than the value at which the asset is shown in the financial statements of the business (Capalbo 2013). The impairment loss of the business should be recorded separately from the depreciation loss of the business.

## Revaluation and Impairment of Assets with Journal Entries

Journal Entries:

 Date Particulars Debit Credit 1/7/2019 Accumulated Depreciation A/c. \$8,000 Equipment A/c. \$8,000 (Being accumulated depreciation written off) Equipment A/c. \$ 5,000 Gain on Revaluation A/c. \$ 5,000 (Being value of equipment increased and gain on revaluation recorded)

Calculation:

Depreciation & Accumulated Depreciation for 1 July 2018 to 30 June 2019:

[Revalued Cost of Equipment – Residual Value] / Estimated Life

= [ \$ 16,000 - \$ 0] / 2 yrs.

= \$ 8,000

Gain / (Loss) on Revaluation:

Revalued Cost of Equipment - [ Cost of Equipment – Accumulated Depreciation]

= \$ 13,000 – [\$ 16,000 - \$ 8,000]

= \$ 13.000 - \$ 8,000

= \$ 5,000 (Profit on Revaluation)

Requirement b:

Journal Entries:

 Date Particulars Debit Credit 30/6/2020 Depreciation A/c. \$10,000 Accumulated Depreciation A/c. \$10,000 (Being depreciation charged on equipment) P/L Summary A/c. \$ 10,000 Depreciation A/c. \$ 10,000 (Being depreciation transferred to P/L Statement) Gain on Revaluation A/c. \$ 5,000 Other Comprehensive Income A/c. \$5,000 (Being gain on revaluation transferred to other comprehensive income) Other Comprehensive Income A/c. \$ 5,000 Asset Revaluation Reserve A/c. \$ 5,000 (Being other comprehensive income from revaluation gain transferred to equity fund)

Calculation:

Depreciation & Accumulated Depreciation for 1 July 2018 to 30 June 2019:

[Revalued Cost of Equipment – Residual Value] / Estimated Life

= [ \$ 13,000 - \$ 3,000] / 1 yrs.

= \$ 10,000

The accountant has wrongly passed the journal entry regarding impairment of assets of the business. The accountant has debited impairment loss and credited accumulated depreciation. The accountant has wrongly mixed up the impairment loss on the equipment with the charges of depreciation which is clearly shown in the journal entry which is passed by the accountant.  The amount for the impairment loss which is computed by the accountant is shown to be \$ 30,000 which is incorrect as well (Kulikova, Gubaidullina and Elsukova 2016). The accurate calculations for the impairment loss which the business incurs on the equipment is shown below and the same is shown by deducting the carrying cost of the plant from the revalued cost of the plan and the same is shown to be \$ 15,000. Therefore, the management needs to pass adjustment entries for improving both the journal entry and also the amount which is shown as impairment loss of the business (Amiraslani, Iatridis and Pope 2013). The revalued cost of the plant is shown to be \$ 225,000 and the carrying cost of the plant is shown to be \$ 2,40,000. Therefore, the provisions for impairments needs to be applied for which necessary adjustment entries regarding impairments needs to be passed by the management.

Calculations:

Gain /(Loss) on Impairment:

Revalued Cost of Plant (Higher of Value in use & Fair Value, less, disposal) – Carrying Cost of Plant

= \$ 225,000 - \$240, 000

= - \$15,000 (Loss on Impairment)

Requirement b:

Journal Entries:

 Date Particulars Debit Credit 1/7/2017 Accumulated Depreciation A/c. \$60,000 Plant A/c. \$60,000 (Being accumulated depreciation written off) Impairment Loss A/c. \$ 15,000 Plant A/c. \$ 15,000 (Being value of equipment decreased and loss on impairment recorded)

Calculation:

Accumulated Depreciation of Plant:

Actual Cost of Plant – Carrying Cost of Plant

= \$300,000 - \$240,000

= \$ 60,000

Requirement c:

Journal Entries:

 Date Particulars Debit Credit 30/6/2018 Depreciation A/c. \$22,500 Accumulated Depreciation A/c. \$ 22,500 (Being depreciation charged on plant) P/L Summary A/c. \$ 22,500 Depreciation A/c. \$ 22,500 (Being depreciation and impairment loss transferred to P/L Statement) Other Comprehensive Income A/c. \$ 15,000 Impairment Loss A/c. \$ 15,000 (Being impairment loss transferred to other comprehensive income) Asset Revaluation Reserve A/c. \$ 15,000 Other Comprehensive Income A/c. \$ 15,000 (Being other comprehensive loss due to impairment transferred to equity fund)

Calculation:

Depreciation from 1 July 2017 to 30 June 2018:

Revalued Cost of Equipment x Rate of Depreciation p.a.

= \$ 225,000 x 10%

= \$ 22,500

 Date Particulars Debit Credit 1/7/2018 Accumulated Depreciation A/c. \$ 22,500 Plant A/c. \$ 22,500 (Being accumulated depreciation written off) Plant A/c. \$ 37,500 Gain on Revaluation A/c. \$ 37,500 (Being value of equipment increased and gain on revaluation recorded)

Calculation:

Gain/(Loss) on Revaluation of Plant:

Revalued Cost of Plant – [Cost of Plant – Accumulated Depreciation]

= \$ 240,000 – [\$ 225,000 - \$ 22,500]

= \$ 240,000 - \$ 202,500

= \$ 37,500

References

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR).

André, P., Filip, A. and Paugam, L., 2015. The effect of mandatory IFRS adoption on conditional conservatism in Europe. Journal of Business Finance & Accounting, 42(3-4), pp.482-514.

Barbe, O., Didelot, L. and Ashta, A., 2014. From Disconnected to Integrated tax and financial systems A post-IFRS evaluation of evolution of Tax and Financial Reporting relationships based on the French case. Research in Accounting Regulation, 26(2), pp.242-256.

Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C., 2013. Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), pp.1143-1177.

Capalbo, F., 2013. Impairment of Assets.

Jaijairam, P., 2013. Fair value accounting vs. historical cost accounting. The Review of Business Information Systems (Online), 17(1), p.1.

Kulikova, L.I., Gubaidullina, A.R. and Elsukova, T.V., 2016. Disclosure of the risks of the organization influencing decision making by users of financial reporting. International Business Management, 10(22), pp.5280-5285.

Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.

Sooriyakumaran, L. and Thirunavukkarasu, V., 2013. Disclosures and impacts of impairment of non-current assets in the financial statements: A study on listed manufacturing companies in Colombo Stock Exchange (CSE) in Sri Lanka.

Trifan, A. and Anton, C., 2014. ACCOUNTING TREATMENT FOR PROPERTY, PLANT AND EQUIPMENT REVALUATIONS. Management & Marketing, 9(2).

Cite This Work

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