Question

Happy owns a building, which was purchased at a cost of $1,000,000 on 30 June 2018 (8 years useful life and no residual value). Happy is carrying the building at fair value. On 30 June 2019 (for the first time after purchase), the building is assessed as having a fair value equal to $1,200,000 and is revalued by Happy.

a) Provide the journal entries to account for the revaluation on 30 June 2019, showing all necessary workings and calculations .

b) Under Accounting Standards an initial revaluation upwards is treated differently to a revaluation decrement in terms of its impact on the income statement. Describe the inconsistence in treatment and possible rational for such an inconsistency.

Answer 1

a) Journal Entry for Revaluation of Building:

Building A/c. Dr.	2,00,0000
To Revaluation A/c		2,00,0000

Workings -

Revaluation Gain = Fair Value of Building on 30 june 2019 - Fair Value of Building on 30 june 2018

= $ 1,200,000 - $ 1,000,000

= $ 200,000.

b) Inconsistencies:

1. Recognising revaluation increments in profit or loss without reversing previous revaluation decrement.

2. Offsetting revaluation increments and decrements across a class of assets rather than for each individual asset.

3. Recycling previous revaluation increments recognised in other comprehensive income as a gain on disposal in profit or loss.

4. Inadequate valuations resulting in excessive gains on disposal being recognised in profit or loss.

Possible Rational:

1. Reversing previous decrement and then recording increment.

2. Proper valuation with proper methods of revaluation.