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Tutorial 3

Management Accounting (University of Western Australia)

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TUTORIAL 3
Exercise 5.11
Depreciation and revaluation of assets

In the 30 June 2016 annual report of Emu Ltd, the equipment was reported as
follows:

Equipment (at cost) $ 500 000

Accumulated depreciation 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 Emu 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 1 July 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.

Required
1. Prepare journal entries to record depreciation during the year ended 30 June
2017, assuming there was no revaluation.
2. Prepare the journal entries for Machine A for the period 1 July 2016 to 30 June
2017 on the basis that it was revalued on 31 December 2016.
3. Prepare the journal entries for Machine B for the period 1 July 2016 to 30 June
2017 on the basis that it was revalued on 31 December 2016.
4. Prepare the revaluation journal entries required for 1 July 2017.
5. According to accounting standards, on what basis may management change the
method of asset measurement, for example from cost to fair value?

EMU LTD
1.
30 June, 2017

Depreciation expense – Machine A Dr 30 000

Accumulated depreciation Cr 30 000
(10% x $300 000)

Depreciation expense – Machine B Dr 20 000

Accumulated depreciation Cr 20 000
(10% x $200 000)

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2.

31 December, 2016

Depreciation expense – Machine A Dr 15 000

Accumulated depreciation Cr 15 000
(1/2 x 10% x $300 000)

Machine A

Cost 300 000

Accum. depreciation 135 000
165 000
Fair value 180 000
Increment 15 000

Accumulated depreciation – Machine A Dr 135 000

Machine A Cr 135 000
(Writing the asset down to carrying amount)

Machine A Dr 15 000
Gain on revaluation of machinery (OCI) Cr 15 000
(Revaluation of machine from $165 000 to $180 000)

Income Tax Expense-OCI Dr 4 500

Deferred Tax Liability CR 4 500
(Tax effect of revaluation of machine)

Gain on revaluation of machinery (OCI) Dr 15 000

Income Tax Expense (OCI) 4 500
Asset revaluation surplus – Machine A Cr 10 500
(Accumulation of net revaluation gain in equity)

30 June, 2017

Depreciation expense – Machine A Dr 15 000

Accumulated depreciation Cr 15 000
(1/2 x $180 000/6yrs)

3.

31 December, 2016

Depreciation expense – Machine B Dr 10 000

Accumulated depreciation Cr 10 000
(1/2 x 10% x $200 000)

Machine B

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Cost 200 000

Accum. depreciation 40 000
160 000
Fair value 155 000
Decrement 5 000

Accumulated depreciation – Machine B Dr 40 000

Machine B Cr 40 000
(Writing the asset down to carrying amount)

Loss – revaluation decrement (P/L) Dr 5 000

Machine B Cr 5 000
(Revaluation of machine from $160 000
to $155 000)

30 June, 2017

Depreciation expense – Machine B Dr 15 500

Accumulated depreciation Cr 15 500
(1/2 x $155 000/5yrs)

4.
Machine A $ Machine B $
Revalued 180 000 Revalued 155 000
Accum. Deprec 15 000 Accum. Deprec 15 500
Carrying amount 165 000 Carrying amount 139 500
Fair value 163 000 Fair value 136 500
Decrement 2 000 Decrement 3 000

Accumulated depreciation – Machine A Dr 15 000

Machine A Cr 15 000
(Writing down to carrying amount)

Loss on revaluation of machinery (OCI) Dr 2 000

Machine A Cr 2 000
(Revaluation downwards)

Deferred Tax Liability Dr 600

Income tax Expense(OCI) Cr 600
(Tax effect of revaluation downwards)

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)

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Accumulated depreciation – Machine B Dr 15 500

Machine B Cr 15 500
(Writing down to carrying amount)

Loss – revaluation decrement (P/L) Dr 3 000

Machine B Cr 3 000
(Writing down to fair value)

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5. Basis for change in accounting policy

Consider 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.

Consider 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.

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Exercise 5.12
Revaluation of assets

On 30 June 2016, the statement of financial position of Kookaburra Ltd showed the
following non-current assets after charging depreciation:

Building $ 300
Accumulated depreciation 000 $200 000
(100
000)
Motor vehicle 120 000
Accumulated depreciation (40 80 000
000)

The company has adopted fair value for the valuation of non-current assets. This has
resulted in the recognition in previous periods of an asset revaluation surplus for the
building of $14 000. On 30 June 2016, an independent valuer assessed the fair
value of the building to be $160 000 and the vehicle to be $90 000.

Required
1. Prepare any necessary entries to revalue the building and the vehicle as at 30
June 2016.
2. Assume that the building and vehicle had remaining useful lives of 25 years and
4 years respectively, with zero residual value. Prepare entries to record
depreciation expense for the year ended 30 June 2017 using the straight-line
method.

KOOKABURRA LTD
General Journal
1.
Accumulated depreciation – Building Dr 100 000
Building 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)

Deferred Tax Liability Dr 6 000

Income Tax Expense (OCI) Cr 6 000
(Being tax effect of revaluation downwards)

Asset revaluation surplus - Building Dr 14 000

Income Tax Expense (OCI) Dr 6 000
Loss on revaluation of building (OCI)Cr 20 000
(Reduction in accumulated equity due to revaluation decrement on building)

Accumulated depreciation – Vehicle Dr 40 000

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Vehicle Cr 40 000
(Writing down to carrying amount)

Vehicle Dr 10 000
Gain on revaluation of vehicle (OCI)Cr 10 000
(Revaluation to fair value)

Income Tax Expense (OCI) Dr 3 000

Deferred Tax Liability Cr 3 000

Gain on revaluation of vehicle (OCI) Dr 10 000

Asset revaluation surplus - vehicle Cr 7 000
Income Tax Expense (OCI) Cr 3 000

2.
Depreciation expense – Building Dr 6 400
Accumulated depreciation – BuildingCr 6 400
($160 000/25)

Depreciation expense – Vehicle Dr 22 500

Accumulated depreciation – VehicleCr 22 500
($90 000/ 4)

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Exercise 5.18
Revaluation model

On 1 July 2016, Peewee Ltd acquired two assets within the same class of plant and
equipment. Information on these assets is as follows.

Cost Expected useful

life
Machine A $100 000 5 years
Machine B 60 000 3 years

The machines are expected to generate benefits evenly over their useful lives. The
class of plant and equipment is measured using fair value.
At 30 June 2017, information about the assets is as follows.

Fair value Expected useful life

Machine A $84 000 4 years
Machine B 38 000 2 years

On 1 January 2018, Machine B was sold for $29 000 cash. On the same day,
Peewee Ltd acquired Machine C for $80 000 cash. Machine C has an expected
useful life of 4 years. Peewee Ltd also made a bonus issue of 10 000 shares at $1
per share, using $8000 from the general reserve and $2000 from the asset
revaluation surplus created as a result of measuring Machine A at fair value.
At 30 June 2018, information on the machines is as follows.

Fair value Expected useful life

Machine A $61 000 3 years
Machine C 68 500 3.5 years

Required
1. Prepare the journal entries in the records of Peewee Ltd to record the events for
the year ended 30 June 2017.
2. Prepare journal entries to record the events for the year ended 30 June 2018.

PEEWEE LTD
1.
1 July 2016

Machine A Dr 100 000

Machine B Dr 60 000
Cash Cr 160 000

30 June 2017

Depreciation expense – Machine A Dr 20 000

Accumulated depreciation – Machine A Cr 20 000
(1/5 x $100 000)

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Depreciation expense – Machine B Dr 20 000

Accumulated depreciation – Machine B Cr 20 000
(1/3 x $60 000)

Accumulated depreciation- Machine A Dr 20 000

Machine A Cr 20 000
(Writing down to carrying amount)

Machine A Dr 4 000
Gain on revaluation of Machine A (OCI) Cr 4 000
(Revaluation increment: $80 000 to $84 000)

Income Tax Expense (OCI) Dr 1 200

Deferred Tax Liability Cr 1 200
(Being tax effect of revaluation increment)

Gain on revaluation of Machine A (OCI) Dr 4 000

Income Tax Expense (OCI) Cr 1 200
Asset revaluation surplus – Machine A Cr 2 800
(Accumulation of net revaluation gain in equity))

Accumulated depreciation – Machine B Dr 20 000

Machine B Cr 20 000
(Writing down to carrying amount)

Loss on revaluation – Machine B (P&L) Dr 2 000

Machine B Cr 2 000
(Revaluation to fair value at 30/6/17)

2.
1 January 2018

Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of machine C)

Depreciation expense – Machine B Dr 9 500

Accumulated depreciation – Machine B Cr 9 500
(1/2 x /1/2 x $38 000)

Cash Dr 29 000
Proceeds on sale of Machine B Cr 29 000
(Sale of Machine B)

Carrying amount of Machine B Sold Dr 28 500

Accumulated depreciation – Machine B Dr 9 500
Machine B Cr 38 000
(Carrying amount of machine sold)

General reserve Dr 8 000

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Asset revaluation surplus – Machine A Dr 2 000

Share Capital Cr 10 000

30 June 2018

Depreciation expense – Machine A Dr 21 000

Accumulated depreciation – Machine A Cr 21 000
(1/4 x $84 000)

Depreciation expense – Machine C Dr 10 000

Accumulated depreciation – Machine C Cr 10 000
(1/4 x ½ x $80 000)

Accumulated depreciation – Machine A Dr 21 000

Machine A Cr 21 000
(Writing down to carrying amount)

Loss on revaluation of Machine A (OCI) Dr 1142

Loss on revaluation of Machine A (P and L) Dr 858
Machine A Cr 2 000
(Write down of plant from $63000 to $61000)

Deferred Tax Liability Dr 342

Income Tax Expense (OCI) Cr 342
(Tax effect of revaluation decrement)

Asset revaluation surplus – Machine A Dr 800

Income Tax Expense (OCI) Dr 342
Loss on revaluation of Machine A (OCI) Cr 1 142
(Accumulation of revaluation loss to equity)

Accumulated depreciation – Machine C Dr 10 000

Machine C Cr 10 000
(Writing down to carrying amount)

Loss on revaluation (P&L) Dr 1 500

Machine C Cr 1 500
(Revaluation to fair value at 30/6/18)

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Exercise 5.19
Determining the cost of assets

Magpie Ltd uses many kinds of machines in its operations. It constructs some of
these machines itself and acquires others from the manufacturers. The following
information relates to two machines that it has recorded in the 2017–18 period.
Machine A was acquired, and Machine B was constructed by Magpie Ltd itself.
Machine A
Cash paid for equipment, including GST of $8000 $88
Costs of transporting machine — insurance and transport 000
Labour costs of installation by expert fitter 3 000
Labour costs of testing equipment 5 000
Insurance costs for 2017–18 4 000
Costs of training for personnel who will use the machine 1 500
Costs of safety rails and platforms surrounding machine 2 500
Costs of water devices to keep machine cool 6 000
Costs of adjustments to machine during 2017–18 to make it 8 000
operate more efficiently 7 500
Machine B
Cost of material to construct machine, including GST of $7000 77 000
Labour costs to construct machine 43 000
Allocated overhead costs — electricity, factory space etc. 22 000
Allocated interest costs of financing machine 10 000
Costs of installation 12 000
Insurance for 2017–18 2 000
Profit saved by self-construction 15 000
Safety inspection costs prior to use 4
000
Required
Determine the amount at which each of these machines should be recorded in the
records of Magpie Ltd. For items not included in the cost of the machines, note how
they should be accounted for.

Machine A

Cost of machine $88 000

(8 000) GST
3 000 Transport
5 000 Installation
4 000 Testing
6 000 Safety rails
8 000 Coolers
7 500 Adjustments
$113 500

Expense the insurance costs of $1 500 and training $2 500.

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Machine B

Cost of machine $77 000

(7 000) GST
43 000 labour
22 000 overheads
10 000 interest *
12 000 installation
4 000 safety
$161 000

* Under AASB 123 Borrowing Costs interest must be capitalised.

Expense the insurance cost of $2 000. Disregard the profit saved by self-
construction.

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