RMIT Classification: Trusted

Chapter 6 - QUESTIONS
Revaluations and impairment testing of non-current assets

6.1. What effect will an asset revaluation have on subsequent periods’ profits? Explain
your answer.

6.13. An item of depreciable machinery is acquired on 1 July 2015 for $120,000. It is

expected to have a useful life of 10 years and a zero residual value. On 1 July 2019, it is
decided to revalue the asset to its fair value of $110,000.
REQUIRED
Provide journal entries to account for the revaluation.

6.16. An asset having a cost of $100,000 and accumulated depreciation of $20,000 is

revalued to $120,000 at the beginning of the year. Depreciation for the year is based on
the revalued amount and the remaining useful life of eight years. Shareholders’ equity,
before adjusting for the above revaluation and subsequent depreciation, is as follows:

$
Share capital 300,000
Revaluation surplus 45,000
Capital profits reserve 85,000
Retained earnings 70,000
500,000

REQUIRED
Prepare journal entries to reflect the revaluation of the asset and the subsequent
depreciation of the revalued asset. Which of the equity accounts would be affected
directly or indirectly by the revaluation?

6.17. Townend Ltd has the following assets in its statement of financial position as at 30
June 2018.

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$
Plant and equipment, at independent valuation 2,000,000
less Accumulated depreciation 400,000
Carrying amount 1,600,000

The plant and equipment originally cost Townend $600,000 in 2016, but due to market
conditions the fair value of the plant and equipment has increased. The directors of
Townend Ltd are concerned about the effects of the higher book value on profits—
owing to the higher depreciation it is reducing profits. They ask you, the accountant, to
reverse the previous revaluation. Being ethical in nature, what would you do?

6.19. Petersen Ltd has the following land and building in its financial statements as at
30 June 2018:

$
Residential land, at cost 1,000,000
Factory land, at valuation 2016 900,000
Buildings, at valuation 2016 800,000
Accumulated depreciation (100,000)

At 30 June 2018, the balance of the revaluation surplus is $400 000, of which $300 000
relates to the factory land and $100 000 to the buildings. On this same date,
independent valuations of the land and building are obtained. In relation to the above
assets, the assessed fair values at 30 June 2018 are:

$
Residential land, previously recorded at cost 1,100,000
Factory land, previously revalued in 2016 700,000
Buildings, previously revalued in 2016 900,000

REQUIRED

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Provide the journal entries to account for the revaluation on 30 June 2018. Petersen Ltd
classifies the residential land and the factory land as different classes of assets.

6.25. On 1 July 2016 Big Wednesday Ltd acquired land at a cost of $1 000 000. Big
Wednesday Ltd makes the following estimates of the value of the land:

Net selling price Value in use Fair value

30 June 2017 $900,000 $1,050,000 $950,000
30 June 2018 $900,000 $960,000 $950,000
30 June 2019 $920,000 $900,000 $970,000

REQUIRED
a. Determine the recoverable amount of the land for each reporting date.
Higher of Net SP or valua in use

30 June 2017 $1,050,000

30 June 2018 $960,000
30 June 2019 $900,000

b. Assume that Big Wednesday Ltd uses the cost method. For each year calculate
the carrying amount of the land. Prepare the journal entries necessary to effect
any adjustments required by accounting standards.
30 Jun 2017 Cost =100,000 < RA= 1,050,000
No entry
30 Jun 2018 CA= 100,000 > RA=960,000
Dr Impairment Loss 40,000
Cr Accu Imp Loss – Land 40,000

c. Assume that Big Wednesday Ltd revalues its land at the end of each year. For
each year calculate the carrying amount of the land. Prepare the journal entries
necessary to effect any adjustments required by accounting standards.

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