AF210 Tutorial 4

1. How is cost determined?

Paragraph 16 of AASB 116/IAS 16 states:
The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site
on which it is located, the obligation for which an entity incurs either when the item is
acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.

Case study 5.1

Fair value basis for measurement

The management of Rocky Ltd has decided to use the fair value basis for the measurement
of its equipment. Some of this equipment is difficult to obtain and has in fact increased in
value over the current period. Management is arguing that, as there has been no decline in
fair value, no depreciation should be charged on these pieces of equipment.
Required
Discuss management’s position.

Depreciation is an allocation of an asset’s depreciable amount over its useful life. Hence,
depreciation is necessary to account for the use of an asset. If management considers that the fair
value of the asset has increased, separate journal entries are required to reflect this detailing: 1)
write off of accumulated depreciation, and 2) revaluation of the asset.

Exercise 5.1

Revaluation adjustments and reversals

On 1 January 2022, Lima Ltd revalued land from $200 000 to $400 000. On 1 January 2023,
the company subsequently revalued the land to $320 000. And on 1 January 2024, the
company again revalued the asset downwards to $160 000.

Required
Prepare the journal entries required to record the revaluation adjustment for the year
ended:
1. 30 June 2022.
2. 30 June 2023.
3. 30 June 2024.
(LO6)

1. 30 June 2022
Land Dr 200 000
Gain on revaluation – Land (OCI) Cr 200 000
(Revaluation of Land from $200 000 to $400 000)

Gain on revaluation – Land (OCI) Dr 200 000

Asset revaluation surplus – Land Cr 200 000
(Accumulation of revaluation gain in equity)

2. 30 June 2023
Loss on revaluation – Land (OCI) Dr 80 000
Land Cr 80 000
(Revaluation of land from $400 000 to $320 000, partially reversing a revaluation
increase)

Asset revaluation surplus – Land Dr 80 000

Loss on revaluation – Land (OCI) Cr 80 000
(Accumulation of revaluation loss in equity)

3. 30 June 2024
Loss on revaluation – Land (OCI) Dr 120 000
Loss on revaluation – Land (P&L) Dr 40 000
Land Cr 160 000
(Revaluation of land from $320 000 to $160 000, partially reversing a revaluation
increase, and recognising a further decrease beyond the original accounting value)

Asset revaluation surplus – Land Dr 120 000

Loss on revaluation – Land (OCI) Cr 120 000
(Accumulation of revaluation loss in equity)

Exercise 5.11

Depreciation and revaluation of assets

In the 30 June 2022 annual report of Wombat Ltd, the equipment was reported as follows:
Equipment (at cost) $ 250 000
Accumulated depreciation 75 000
175 000
The equipment consisted of two machines, Machine A and Machine B. Machine A had cost
$150 000 and had a carrying amount of $90 000 at 30 June 2022. Machine B had cost $100
000 and had a carrying amount of $85 000. Both machines are measured using the cost model
and depreciated on a straight-line basis over a 10-year period.
On 31 December 2022, the directors of Wombat Ltd decided to change the basis of measuring
the equipment from the cost model to the revaluation model. Machine A was revalued to $90
000 with an expected useful life of 6 years, and Machine B was revalued to $77 500 with an
expected useful life of 5 years.
At 1 July 2023, Machine A was assessed to have a fair value of $81 500 with an expected
useful life of 5 years, and Machine B’s fair value was $68 250 with an expected useful life of
4 years.
Required
1. Prepare journal entries to record depreciation during the year ended 30 June 2023,
assuming there was no revaluation.
2. Prepare the journal entries for Machine A for the period 1 July 2022 to 30 June 2023 on
the basis that it was revalued on 31 December 2022.
3. Prepare the journal entries for Machine B for the period 1 July 2022 to 30 June 2023 on
the basis that it was revalued on 31 December 2022.
4. Prepare the revaluation journal entries required for 1 July 2023.
5. According to accounting standards, on what basis may management change the method
of asset measurement, for example from cost to fair value?
(LO5 and LO6)
1.
30 June 2023
Depreciation expense – Machine A Dr 15 000
Accumulated depreciation – Machine A Cr 15 000
(10% x $150 000)

Depreciation expense – Machine B Dr 10 000

Accumulated depreciation – Machine B Cr 10 000
(10% x $100 000)
2.
31 December 2022
Depreciation expense – Machine A Dr 7 500
Accumulated depreciation – Machine A Cr 7 500
(1/2 x 10% x $150 000)

Machine A: $
Cost 150 000
Accum. depreciation 67 500
82 500
Fair value 90 000
Increment 7 500

Accumulated depreciation – Machine A Dr 67 500

 Machine A Cr 67 500
(Writing the asset down to carrying amount)

Machine A Dr 7 500
Gain on revaluation – Machine A (OCI) Cr 7 500
(Revaluation of machine from $82 500 to $90 000)

Gain on revaluation – Machine A (OCI) Dr 7 500

Asset revaluation surplus – Machine A Cr 7 500
(Accumulation of net revaluation gain in equity)

30 June 2023
Depreciation expense – Machine A Dr 7 500
Accumulated depreciation – Machine A Cr 7 500
(1/2 x $90 000/6yrs)

3.
31 December 2022
Depreciation expense – Machine B Dr 5 000
Accumulated depreciation – Machine B Cr 5 000
(1/2 x 10% x $100 000)

Machine B $
Cost 100 000
Accum. depreciation 20 000
80 000
Fair value 77 500
Decrement 2 500

Accumulated depreciation – Machine B Dr 20 000

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

Loss on revaluation – Machine B (P&L) Dr 2 500

Machine B Cr 2 500
(Revaluation of machine from $80 000 to $77 500)

30 June 2023
Depreciation expense – Machine B Dr 7 750
Accumulated depreciation – Machine B Cr 7 750
(1/2 x $77 500/5yrs)
4.
Machine A $ Machine B $
Revalued amount 90 000 Revalued amount 77 500
Accum. Deprec. 7 500 Accum. Deprec. 7 750
Carrying amount 82 500 Carrying amount 69 750
 Fair value 81 500 Fair value 68 250
Decrement 1 000 Decrement 1 500

Accumulated depreciation – Machine A Dr 7 500

Machine A Cr 7 500
(Writing down to carrying amount)
Loss on revaluation – Machine A (OCI) Dr 1 000
Machine A Cr 1 000
(Revaluation downwards)

Asset revaluation surplus – Machine A Dr 1 000

Loss on revaluation – Machine A (OCI) Cr 1 000
(Reduction in accumulated equity due
to revaluation decrement)

Accumulated depreciation – Machine B Dr 7 750

Machine B Cr 7 750
(Writing down to carrying amount)

Loss on revaluation – Machine B (P&L) Dr 1 500

Machine B Cr 1 500
(Writing down to fair value)

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.