Revised Amount That Building And Machinery Essay

Question:

Discuss About The Revised Amount That Building And Machinery?

Answer:

Introducation

Briefly explain why, after the fire, Rebecca and Dario do not want to record the revaluation for the building and impairment loss for the machinery and whether they can change from the revaluation to the cost model for the building. Identify and discuss which qualitative characteristics of financial reporting would be violated if the revaluation and impairment loss are not recorded.

Solution

The recognition of downward revaluation and impairment loss reduces the value of the assets and subsequently have negative impact on the stakeholders. Further, downward revaluation directly impacts the profit & loss account of the company as it is debited to P&L a/c. Hence, it will reduce the profit of the company and have a negative impression due to reduced profitability. Due to these factors, after the fire, Rebecca and Dario do not want to record the revaluation for the building and impairment loss for the machinery.

As per AASB, 108 “Accounting Policies, Changes in Accounting Estimates and Errors” para 17,

“17 The initial application of a policy to revalue assets in accordance with AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets is a change in an accounting policy to be dealt with as a revaluation in accordance with AASB 116 or AASB 138, rather than in accordance with this Standard.”

Hence, the change in valuation method from revaluation to cost model is considered as change in accounting policy and as per AASB 116, this change needs to be accounted for retrospectively.

The following qualitative characteristics of financial reporting would be violated if the revaluation and impairment loss are not recorded:

True and Fair view - The financial statements are mandated to be presented on the basis of true and fair view meaning thereby they should reflect the actual value and amounts of the assets, liabilities, equities, incomes and expenses presented. Non recognition of revaluation or impairment loss will result in higher book value of the assets in the financials whereas in actual their fair value or recoverable value or realizable value is lower than presented. Thus, it will fail the basic criteria for preparation and presentation of the financials.

Comparability - Comparability means the financials of the company should be comparable with the financials of other companies in the same industry. If the value of assets in the financial is not correct, then the financials will become incomparable.

Impact on Decision Making - Due to non-recording of revaluation and impairment loss, the asset value as shown in the financials will be higher and simultaneously the profit shown under retained earnings will also be higher. Due to this, the balance sheet will be overstated and the financial ratios calculated on the basis of these figures will also be lead to misleading results. Hence, the stakeholders and management will not be able to take correct decisions as the financials are not true and fair.

Assuming that the revaluation reversal for the building and impairment loss for the machinery are recorded, calculate the revised amount that the building and machinery should be recorded for 30 June 2016 and record the general journal entries to recognise the revaluation and impairment of these non-current assets. In your answer, justify how you determined the machine’s recoverable amount. Show your calculations.

The revised amount for the building to be recorded on 30 June 2016 is $150,000 i.e. the fair value of building on that date.

The revised amount for the machinery to be recorded on 30 June 2016 is $13,052. It is calculated as under:

Since, the cost model is used for valuation of machinery the recoverable amount of the machinery as on 30 June, 2016 will be recorded in the books. The recoverable amount is higher of fair value less cost to sell and value in use.

The fair value of the machine as on 30 June 2016 is $14,104 and cost of sell is $1,052. So, the fair value less cost to sell comes to $13,052 (14,104-1,052) and the value in use of the machine is $12,300.

Hence, the recoverable amount is higher of $13,052 and $12,300 which comes to $13,052.

Journal Entries to recognize the revaluation and impairment of these non-current assets

Date

Particulars

Dr./Cr.

Amount

30 June, 2016

Revaluation Surplus

Impairment Loss – Building (WN-2)

Building

Accumulated Impairment Loss - Building

Dr.

Dr.

Cr.

Cr.

$88,500

$ 3,500

$88,500

$3,500

30 June, 2016

Impairment Loss – Machinery *

Accumulated Impairment Loss - Machinery

Dr.

Cr.

$21,895

$21,895

* Impairment Loss – Machinery = Carrying amount – Recoverable amount

Impairment Loss – Machinery = $34,947 (refer WN-1) – $13,052

= $ 21,895


WN-1 Calculation of Carrying amount of machine:

Cost of machine

100,000

Add: Other costs

4,800

Less: Trade discount

-10,000

Total costs of machine

94,800

For the year ended

Dep @ 20%

WDV

30 June, 2012

9,480

85,320

30 June, 2013

17,064

68,256

30 June, 2014

13,651

54,605

30 June, 2015

10,921

43,684

30 June, 2016

8,737

34,947

WN-2 Calculation of Impairment Loss – Building:

Fair value of Building as on 30 June, 2014 - $350,000

For the year ended

Dep @ SLM

WDV

30 June, 2015

54,000

296,000

30 June, 2016

54,000

242,000

Thus, the carrying value of building as on 30 June, 2016 is $242,000 and the fair value is $150,000. Hence, the total downwards revaluation is $92,000 ($242,000-$150,000).

The downward revaluation is adjusted from the revaluation surplus to the extent available i.e. $88,500 and remaining will be debited in P$L i.e. $3,500 ($92,000-$88,500).

References:

[Accessed 16 Jan. 2018].

[Accessed 16 Jan. 2018].

[Accessed 16 Jan. 2018].

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