Problem 1

 MCM Design House Ltd leased an office for a lease term of 6 years in 2019 and incurred 600,000
in decorating the office.
 The lease requires MCM to restore the office to its original status when the lease expires.
 Miss Mary Co, the finance director of MCM, estimates that the total cost of restoration will be
around 70,000 at that time (at the end of 6th year) and the discount rate  to MCM is 6%.
 Required: Determine the decoration.

Answer:
 
_ The cost of the decoration should be 600,000 plus the present value of initial estimates of the costs of
removing thee decoration and restoring the office.
70,000/(1+6%) to the power of 6 = 49,347.
 Therefore, the total cost of decoration recognised initially in the statement of financial position is
649,347=(600,000 + 49,347) and the journal entry is:
 PPE                                                   649,347
        Cash                                                              600,000
         Liabilities - obligation on restoration           49,347

Problem 2
Mary has properties with a carrying amount of 5 million. She is going to exchange her properties for a
house which has a market value of 30 million by paying an additional sum of cash of 10 million.

Answer:

PPE - house                                                    30M

           PPE - property                                                       5m
           Cash.                                                                      10M
           Gain on disposal (30M- 5M-10M).                      15M
Based on the evaluation of cash flows arising from the assets exchanged, management determines that
this transaction has commercial substance.

PPE - house (5M+10M).                                  15M

           PPE - Property                                                       5M
           Cash                                                                       10M
Based on the evaluation of cash flows arising from the assets exchanged, management determines that
this transaction lacks commercial substance.

Problem 3

 • Miljane bought a car with a cost of 60,000 on 1 Jan 2020 and adopted the revaluation model.

• The estimated useful life of the car is 6 years.

• On 1 Jan 2021, the car was revalued with a fair value of $58,000 at that date.
• Miljane  opts for the annual transfer from revaluation reserve to retained earnings.
Required: Prepare the journal entries for the year ended 31 Dec 2020 and 31 Dec 2021.

Answer:
At Jan 1, 2020

  PPE - Cost.                                                            60,000

             Cash.                                                                          60,000
Year ended Dec. 31, 2020

 Depreciation (60k/6)                                              10,000

             Accumulated depreciation.                                       10,000

At Jan. 1, 2021

 Accumulated depreciation.                                   10,000     

               PPE - Cost (58k FV - 60k Cost.                                2,000               
              Revaluation surplus                                                     8,000

Year ended Dec. 31, 2021

Depreciation (58k/5)                                                11,600

         Accumulated depreciation.                                               11,600

Revaluation reserves.                                                 1,600

 (8k/5= Revaluation reserves balance/ remaining useful life)
         Retained earnings.                                                              1,600

Problem 4

 • MCM bought a car with a cost of 50,000 on Jan. 1, 2020 and adopted the revaluation model.
  The estimated useful life of car is 5 years.
 On Jan. 1, 2021, the car was revalued with a fair value of 48,000 at that date.
 On Jan.  1, 2022, the car was revalued again at 50,000.
 On Jan. 1, 2023, the car was sold a third party at a bargain price of 38,000.
Required: Prepare the journal entries for the year to Dec. 31 2022 and as at Jan. 1, 2023.
Answer:
 
At 1 Jan 2022

Accumulated depreciation.                                       12,000 

PPE – cost (50,000 FV – 48,000 Cost)                       2,000
                 Revaluation surplus                                                 
                 (12k+2k or 50,000-36k)                                       14,000                                                        

Year ended Dec. 31, 2020

Depreciation ($50,000/3).                                         16,667

                   Accumulated depreciation.                                16,667
Revaluation reserves.                                                    6,667
     (8k-2k+14k)/3 remaining life
                   Retained Earnings.                                               6,667

At Jan 1, 2023
Bank.                                                                            38,000
Accumulated depreciation.                                         16,667
                  PPE - cost.                                                              50,000
                  Gain on disposal                                                       4,667

Revaluation reserves.                                                  13,333

  (8k-2k+14k-6,667)
                   Retained earnings.                                                  13,333

Problem 5

 
  JBC, a manufacturing company, purchases a freehold property (with land and building) for 1M on 1
January 2020 for its investment potential. The land element of the cost is believed to be 400,000, and the
buildings element is expected to have a useful life of 50 years. At 31 December 2020, local property
indices suggest that the fair value of the property has risen to 1.1M. Show how the property would be
presented in the financial statements as at 31 December 2020.
Answer:

If Cost model is adopted...

Depreciation (600k/50).                               12,000
       Accumulated depreciation.                                    12,000
In thE SFP or Statement of Financial Position, the property will be shown at a NBV or Net Book Value of
1,000,000 - 12,000 = 988,000

If FV model is adopted....
Property (1.1M-1M).                                      100,000
       Fair value gain.                                                         100,000 

In the SFP, the property will be shown at its fair value of 1.1M.