Revised Amount That Building And Machinery - Myassignmenthelp.Com

Question: Discuss About The Revised Amount That Building And Machinery? Answer: Introducation Briefly explain why, after the fire, Rebecca and Dario do not want to record the revaluation for the building and impairment loss for the machinery and whether they can change from the revaluation to the cost model for the building. Identify and discuss which qualitative characteristics of financial reporting would be violated if the revaluation and impairment loss are not recorded. Solution The recognition of downward revaluation and impairment loss reduces the value of the assets and subsequently have negative impact on the stakeholders. Further, downward revaluation directly impacts the profit loss account of the company as it is debited to PL a/c. Hence, it will reduce the profit of the company and have a negative impression due to reduced profitability. Due to these factors, after the fire, Rebecca and Dario do not want to record the revaluation for the building and impairment loss for the machinery. As per AASB, 108 Accounting Policies, Changes in Accounting Estimates and Errors para 17, 17 The initial application of a policy to revalue assets in accordance with AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets is a change in an accounting policy to be dealt with as a revaluation in accordance with AASB 116 or AASB 138, rather than in accordance with this Standard. Hence, the change in valuation method from revaluation to cost model is considered as change in accounting policy and as per AASB 116, this change needs to be accounted for retrospectively. The following qualitative characteristics of financial reporting would be violated if the revaluation and impairment loss are not recorded: True and Fair view - The financial statements are mandated to be presented on the basis of true and fair view meaning thereby they should reflect the actual value and amounts of the assets, liabilities, equities, incomes and expenses presented. Non recognition of revaluation or impairment loss will result in higher book value of the assets in the financials whereas in actual their fair value or recoverable value or realizable value is lower than presented. Thus, it will fail the basic criteria for preparation and presentation of the financials. Comparability - Comparability means the financials of the company should be comparable with the financials of other companies in the same industry. If the value of assets in the financial is not correct, then the financials will become incomparable. Impact on Decision Making - Due to non-recording of revaluation and impairment loss, the asset value as shown in the financials will be higher and simultaneously the profit shown under retained earnings will also be higher. Due to this, the balance sheet will be overstated and the financial ratios calculated on the basis of these figures will also be lead to misleading results. Hence, the stakeholders and management will not be able to take correct decisions as the financials are not true and fair. Assuming that the revaluation reversal for the building and impairment loss for the machinery are recorded, calculate the revised amount that the building and machinery should be recorded for 30 June 2016 and record the general journal entries to recognise the revaluation and impairment of these non-current assets. In your answer, justify how you determined the machines recoverable amount. Show your calculations. The revised amount for the building to be recorded on 30 June 2016 is $150,000 i.e. the fair value of building on that date. The revised amount for the machinery to be recorded on 30 June 2016 is $13,052. It is calculated as under: Since, the cost model is used for valuation of machinery the recoverable amount of the machinery as on 30 June, 2016 will be recorded in the books. The recoverable amount is higher of fair value less cost to sell and value in use. The fair value of the machine as on 30 June 2016 is $14,104 and cost of sell is $1,052. So, the fair value less cost to sell comes to $13,052 (14,104-1,052) and the value in use of the machine is $12,300. Hence, the recoverable amount is higher of $13,052 and $12,300 which comes to $13,052. Journal Entries to recognize the revaluation and impairment of these non-current assets Date Particulars Dr./Cr. Amount 30 June, 2016 Revaluation Surplus Impairment Loss Building (WN-2) Building Accumulated Impairment Loss - Building Dr. Dr. Cr. Cr. $88,500 $ 3,500 $88,500 $3,500 30 June, 2016 Impairment Loss Machinery * Accumulated Impairment Loss - Machinery Dr. Cr. $21,895 $21,895 * Impairment Loss Machinery = Carrying amount Recoverable amount Impairment Loss Machinery = $34,947 (refer WN-1) $13,052 = $ 21,895 WN-1 Calculation of Carrying amount of machine: Cost of machine 100,000 Add: Other costs 4,800 Less: Trade discount -10,000 Total costs of machine 94,800 For the year ended Dep @ 20% WDV 30 June, 2012 9,480 85,320 30 June, 2013 17,064 68,256 30 June, 2014 13,651 54,605 30 June, 2015 10,921 43,684 30 June, 2016 8,737 34,947 WN-2 Calculation of Impairment Loss Building: Fair value of Building as on 30 June, 2014 - $350,000 For the year ended Dep @ SLM WDV 30 June, 2015 54,000 296,000 30 June, 2016 54,000 242,000 Thus, the carrying value of building as on 30 June, 2016 is $242,000 and the fair value is $150,000. Hence, the total downwards revaluation is $92,000 ($242,000-$150,000). The downward revaluation is adjusted from the revaluation surplus to the extent available i.e. $88,500 and remaining will be debited in P$L i.e. $3,500 ($92,000-$88,500). References: https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf [Accessed 16 Jan. 2018]. https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 16 Jan. 2018]. https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf [Accessed 16 Jan. 2018].