Question

Koh Brothers Limited acquired a factory for $54 million on June 30, 2013, to produce hospital machines and equipment. The company estimated the factory has a useful life of 25 years with $2 million in residual value at the end of its useful life. The company adopted a straight-line depreciation method for all its property, plant, and equipment. The factory’s market value appreciated steadily to $60 million at the end of the company’s financial year, December 31, 2013. On June 30, 2014, the factory was sold for cash at $59 million. Assume that Koh Brothers Limited accounted for the factory using the cost method after initial recognition and that on June 30, 2014, the factory was rented out to another unrelated party. The market value of the factory was $59 million on June 30, 2014. The company used the fair value method to account for all investment property. Show the journal entries to record the change in use of the factory.

Answer 1

Date	Journal entries	Debit	Credit
30-6-2013	Property,plant&equipment	54,000,000
	Cash		54,000,000
	(Acquired machines $ equipments)
31-12-2013	Property,plant&equipment	6,000,000
	Fair value gain1		6,000,000
	(Record the gain from acquired plant)

30-6-2014	Cash	59,000,000
	Loss on disposal	1,000,000
	Property,plant&equipment		60,000,000
	(Sold plant at a loss)

Working note (1)

Fair value gain = 60,000,000 - 54,000,000 = 6,000,000