ACW 2491 Financial Accounting

Topic 5: Property, Plant and Equipment (Revaluation Model)

Workshop exercises

Issues:
1. Initial recognition of PPE- purchase price, directly attributable costs, costs of dismantling,
removal and disposal
2. Revaluation model
a. Fair value(FV) vs Carrying amount (CA)
b. Revaluation upwards and downwards; initial and subsequent

Exercise1:
On 30 June 2015, an item of machine had a cost of $100,000 and carrying amount of $90,000. The
machine is measured using the cost model, and depreciated on a straight line basis over 10-year period.
On 31 December 2015, the company decided to change the basis of measuring the machine from cost
model to the revaluation model. The machine was revalued to $88,000. At 30 June 2016, the machine
was assessed to have a fair value of $79,000 with an expected useful life of 5 years.
Required:
Prepare the journal entries during the period 1 July 2015 to 30 June 2016 in relation to the machine.
Steps:
1. Identify model – Revaluation
2. Values to find and use: Carrying amount Vs Fair value
3. Entries required for revaluation upwards or downwards
a. Upwards: Record depreciation expense (if needed); Close Acc depreciation; Revalue
upwards, Tax effect on depreciation; Net effect to equity
b. Downwards: Record depreciation (if needed); Close Acc depreciation; Revaluation
downward charge to PL
4. Subsequent reversal?
a. Downwards reversing upwards
b. Upwards reversing downwards
Solution for Exercise 1
31-Dec-15
Depreciation expense 5,000
Acc Depreciation 5,000
(Record current depreciation)

Acc Depreciation 15,000

Machine 15,000
(Close accumulated depreciation)

Machine 3,000
Gain on Revaluation- OCI 3,000
(Revaluation of asset)
 ITE- OCI 900
DTL 900
(Tax effect on depreciation)

Gain on Revaluation- OCI 3,000

ITE- OCI 900
ARS 2,100
(Accumulation of net revaluation gain in equity)

30-Jun-16
Depreciation expense 5,176
Acc Depreciation 5,176
(Record current depreciation)

Acc Depreciation 5,176

Machine 5,176
(Close accumulated depreciation)

Loss on revaluation - OCI 3,000

Loss on revaluation- PL 823
Machine 3,823
(Downwards revaluation reversing previous upwards)

DTL 900
ITE- OCI 900
(Tax effect on depreciation)

Asset Revaluation Surplus 2,100

ITE - OCI 900
Loss on Revaluation- OCI 3,000
(Accumulation of net revaluation gain in equity)

Exercise2:
On 30 June 2016, an item of machine had a cost of $100,000 and carrying amount of $90,000. The
machine is measured using the cost model, and depreciated on a straight line basis over 10-year period.
On 31 December 2016, the company decided to change the basis of measuring the machine from cost
model to the revaluation model. The machine was revalued to $80,000. At 30 June 2017, the machine
was assessed to have a fair value of $80,500 with an expected useful life of 5 years.
Required:
Prepare the journal entries during the period 1 July 2016 to 30 June 2017 in relation to the machine.
Solution for Exercise 2
31-Dec-16
Depreciation expense 5,000
Acc Depreciation 5,000
(Record current depreciation)

Acc Depreciation 15,000

Machine 15,000
(Close Acc depreciation)

Loss on revaluation- PL 5,000

Machine 5,000
(Revaluation downwards)

30-Jun-17

Depreciation expense 4,706

Acc Depreciation 4,706

(Record current depreciation)

Acc Depreciation 4,706

Machine 4,706

(Close acc depreciation)

Machine 5,206

Gain on revaluation- PL 5,000

Gain on Revaluation – OCI 206

(Upwards revaluation reversing previous downwards)

ITE - OCI 62

DTL 62

(Tax effect on revaluation)

Gain on Revaluation – OCI 206

ITE- OCI 62

Asset Revaluation Surplus 144

(Net effect of revaluation to equity)