Question

Problem One:

On January 1, 2015, Weez Ltd acquired a block of land for $100,000, and, on the same day, Will Ltd purchased the adjacent, virtually identical block, also for $100,000. Buildings existed on both blocks, and the land and buildings were classified as PP & E by both companies. Also, both companies initially adopted the cost model.

The two blocks of land were appraised at $120,000 each on June 30, 2016 and at $180,000 each on June 30, 2017. Weez Ltd adopted the revaluation model for its land on June 30, 2017, whereas Will Ltd retained the cost model. Both businesses have June 30 financial year ends. On April 30, 2018, each company sold its block of land for $200,000. (Note: Weez Ltd recorded no further revaluations after June 30, 2017.) Ignore GST for this problem.

Required:

In relation to the land, how much profit would each company report for the following financial years? Explain your answer.

June 30, 2016?

June 30, 2017?

June 30, 2018?

Suppose that the valuations on June 30, 2017 had shown the value of the land to be $80,000 instead of $180,000. Assume the land was still sold for $200,000 in 2018. Now how much profit would each company report for the following financial years? Explain your answer.

June 30, 2017?

June 30, 2018?

Comparability is an enhancing qualitative characteristic; however, it is sometimes compromised by the results achieved from legitimate accounting choices permitted by the standards. Suppose you are an investor evaluating the 2017 and 2018 financial statements of Weez Ltd and Will Ltd under scenario a), above. Construct an argument that comparability is compromised and that the accounting appears illogical under the facts.

Identify the inconsistency inherent in the revaluation model for PP & E. Should this be justified by prudence? Does this same inconsistency exist for investment property? Explain your answer.

Investment property also may be valued under either the cost or revaluation model. Is depreciation handled consistently under both models? Explain your answer. Make an argument for not depreciating investment property at all.

Answer 1

1.

WEEZ LTD

WILL LTD.

JUNE 30TH 2016

COST OF LAND

100000

100000

THERE WILL BE NO PROFIT RECORDED BY BOTH THE COMPANIES AS BOTH ARE FOLLOWING COST MODEL. WEEZ LTD WILL LTD. JUNE 30TH 2017 COST OF LAND 180000 100000 THERE WILL BE NO PROFIT RECORDED BY WILL LTD AS THE SAME IS STILL OPTING FOR COST MODEL. WEEZ LTD WILL RECORD A PROFIT OF $80,000 $80,000 WILL BE CREDITED TO OTHER COMPREHENSIVE INCOME AND ACCUMULATED IN EQUITY UNDER THE HEADING REVALUATION SURPLUS

JUNE 30TH 2018

WEEZ LTD WILL RECORD A PROFIT OF $ 20,000 AS IT IS FOLLOWING REVALUATION MODEL. WILL LTD WILL RECORD A PROFIT OF $100,000 AS IT IS FOLLOWING COST MODEL.

IF THE VALUE OF LAND AS ON JUNE 30 2017 IS $ 80,000 THAN WEEZ LTD WILL RECORD A LOSS OF $20,000 AND THE WILL LTD BOOKS WILL REMAIN UNAFFECTED

NOW IF THE LAND IS SOLD FOR $200,000 THAN WEEZ LTD WILL RECORD A PROFIT OD $ 120,000 AND WILL LTD WILL RECORD A PROFIT OF $ 100,000.