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

Question 2

Describe the fair value of an asset.

Question 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).

Question 4 (continues from question 3)

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.

Question 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

Question 6 (continues from question 5)

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.

Question 1

The AASB 16 “Property, Plant and Equipment” deals with the accounting of the property, plant and equipment and provides detailed explanation of the accounting treatment. In accordance to the AASB 16 the cost of the Property or the Plant is measured and depreciated either by cost or revaluation model to distribute the actual value of the asset over the functional useful life of the assets (Bird et al., 2017,p. 150-166).

The Para 6 of AASB 16 defines carrying amount of an asset as the amount that is determined after recognising accumulated depreciation and the accumulated loss on impairment. The accumulated depreciation is measure as the summation of all the depreciation that is being provided on a particular asset or group of asset. The business or entity can either use the cost model or revaluation model as the accounting policy for valuing property, plant and equipment.

The Para 30 of standard states that as per cost model the carrying value of an assets is determined after deducting accumulated depreciation from the carrying value of an assets (Doxey et al., 2015). This technique is called as the cost technique as the original cost used to determine the actual present value of the asset.

Answer to Question 2

The Para 6 of the AASB 16 defines fair value of an asset as price that can be received on the transfer or sales of the assets between the participant in the market. In the accounting procedure the fair value concept is use to display the actual value of the assets. Whenever a new plant, property, or any asset is, acquire by an entity with the intention to use in the production or consumption the value of that particular asset decrease due to the usage and general wear and tear (Vera-Muñoz, 2015, p.77-80). Therefore, the overall value of the asset decreased. The fair value is the depreciated or current value of that asset. In possible cases, the fair value may be equal to the depreciated amount, but it is not necessary to be. The fair value is the price a particular asset that the owner will get from the sale of it.

Answer to question 3:

In the given journal, the accountant has not followed the accounting methods. The accountant makes wrong calculation of depreciation and the profit on revaluation. The first journal entry is made for recognising additional depreciation by debiting revaluation loss and transferring accumulated depreciation (Parker & Fleischman, 2017). In the second journal entry the loss on revaluation loss is recognised in the statement of comprehensive income as per accounting standard.

 In the books of Valdivia Company Journal Entry Date Particulars Debit Credit 1.7.18 Revaluation (loss) \$9,000.00 Acc. Depreciation \$9,000.00 (Being additional depreciation recorded due to revaluation.) Profit or loss Account \$9,000.00 Revaluation (loss) \$9,000.00 (Being the loss on revaluation transferred to statement of comprehensive income statement.)
 Calculation of Depreciation Particulars Amount Cost 55000 Residual value 5000 50000 useful life 5 Depreciation amount \$10,000.00
 Calculation of Loss on revaluation Particulars Amount Initial Cost \$55,000.00 Accumulated Depreciation \$30,000.00 Written Down value of Assets \$25,000.00 Revalued Amount of Assets \$16,000.00 Loss on Revaluation \$9,000.00
 In the books of Valdivia Company Journal Entry Date Particulars Debit Credit 1.7.19 Acc. Depreciation \$5,000.00 Revaluation (profit) \$5,000.00 (Being additional depreciation recorded due to revaluation.) Revaluation (profit) \$5,000.00 Profit or loss Account \$5,000.00 (Being the loss on revaluation transferred to statement of comprehensive income statement.)
 Calculation of Depreciation Particulars Amount Revalued Amount \$16,000.00 useful life 2 Depreciation amount for 30.06.2019 \$8,000.00
 Calculation of Loss on revaluation Particulars Amount Written Down value of Assets \$8,000.00 Revalued Amount of Assets \$13,000.00 Profit on Revaluation \$5,000.00
 In the books of Valdivia Company Journal Entry Date Particulars Debit Credit 30.06.2020 Depreciation \$10,000.00 Accumulated Depreciation \$10,000.00 (Being depreciation recorded)

In the given case the accountant has not followed the actual accounting procedure. The asset is depreciated from 240000 by 10 percent of the cost of \$300000 on straight-line basis. Then the actual caring amount comes to \$210000 but the value determined of the asset is \$225000. The fair vale less disposal is considered here. However, the fair value is deducted from the opening amount of the asset not from the determined value. The accountant booked double loss in the books.

 Depreciation Calculation Original cost \$300,000.00 Depreciation Rate 10% Date Op Value Depreciation Closing Value 30.6.17 \$240,000.00 \$15,000.00 \$225,000.00 1.7.17 \$225,000.00 disposal \$210,000.00 loss on revaluation \$15,000.00 Acc Depreciation \$90,000.00 \$210,000.00 30.6.18 210000 \$30,000.00 \$180,000.00
 Journal Entry Date Particulars Debit Credit 1.7.17 Impairment loss \$15,000.00 Acc. Depreciation \$15,000.00 Being the Revaluation Profit Transferred 1.7.17 Profit and loss \$15,000.00 Impairment loss \$15,000.00 Being the amount of loss debited from the profit and loss account.
 Journal Entry Date Particulars Debit Credit 30.6.18 Depreciation \$30,000.00 Plant \$30,000.00 Bing the depreciation charged on SLM basis

In this portion, the asset is again revalued on July 1 2017, at \$240000. The accounting procedure are.

 Depreciation Calculation Original cost \$300,000.00 Depreciation Rate 10% Date Op Value Depreciation Closing Value 30.6.17 \$240,000.00 \$30,000.00 \$210,000.00 1.7.17 \$210,000.00 Revalued 240000 Profit on Disposal 30000 Acc Depreciation 60000 240000 Journal Entry Date Particulars Debit Credit 1.7.17 Plant \$30,000.00 Revaluation Profit \$30,000.00 (Being the Revaluation Profit Transferred) 1.7.17 Acc. Depreciation \$30,000.00 Revaluation Profit \$30,000.00 (Being the amount of profit debited from the depreciation funds.)

Reference

Bird, A., Edwards, A., & Shevlin, T. (2017). We examine whether the Public Company Accounting Oversight Board (PCAOB) international inspection program improves audit quality for a sample of non-US-listed foreign public client companies from 55 countries audited by foreign (ie, non-US) auditors. For a sample of non-US-listed clients of PCAOB-registered foreign auditors, we find that initial PCAOB inspections improve audit quality, over and..

Doxey, M. M., Geiger, M. A., Hackenbrack, K. E., & Stein, S. E. (2015). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form: Participating Committee Members. Current Issues in Auditing, 10(1), C1-C10.

Gimbar, C., Hansen, B., & Ozlanski, M. E. (2015). Early evidence on the effects of critical audit matters on auditor liability. Current Issues in Auditing, 10(1), A24-A33.

Parker, L. D., & Fleischman, R. K. (2017). What is Past is Prologue: Cost Accounting in the British Industrial Revolution, 1760-1850. Routledge.

Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts and practice.

Vera-Muñoz, S. C. (2015). Commentary on “The effect of an audit judgment rule on audit committee members’ professional skepticism: The case of accounting estimates”(Kang, Trotman, and Trotman). Accounting, Organizations and Society, 46, 77-80.

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