Question

Problem Two:

Ignore GST. Assume annual accounting periods ending on June 30. On January 1, 2014, Malkin Ltd bought a building for $3,000,000; its useful life was 30 years, its residual value nil, and the straight-line method would be used for depreciation. The cost model was adopted. On June 30, 2016, Malkin Ltd decided to adopt the revaluation model for its building.

Required:

Calculate the book values of the building on June 30, 2014, June 30, 2015, and June 30, 2016 (prior to the revaluation).

On June 30, 2016, the building was determined to have a fair value of $3,100,000.   Prepare journal entries to revalue the building. Prepare the closing entry related to the revaluation.

Prepare the depreciation entry for June 30, 2017, assuming the useful life has increased to 40 years for the financial year ending June 30, 2017 going forward.

On June 30, 2017 the building was determined to have a fair value of $2,500,000. Prepare the journal entry to revalue the building. (Hint: Do not ignore b) and c) above.) Also prepare the applicable closing entries for the revaluation only.

Assume that when the balance in Accumulated Depreciation was $360,000 and up to date, and the balance in building was $2,900,000, the building was sold for $3,000,000. The purchaser paid with a $2,000,000 two year promissory note (9% rate) and cash for the balance.

Prepare the journal entry for the disposal.

Assuming you recognised a gain, where in the SOCI should this gain appear? Explain why.   Would your answer change if you recognised a loss?

Answer 1

	Calculationof Book Value of the Building on Cost model.
Date		Building Value	Life of Building	Method of Depreciation	Depreciation per Year	Book Value of Building
01-Jan-14	Building Bought	$ 30,00,000	30 years	Straight line	100000
30-Jun-14	Book closing Period		for 1/2 year	Straight line	50000	$ 29,50,000
30-Jun-15			for 1 year		100000	$ 28,50,000
30-Jun-16			for 1 year		100000	$ 27,50,000
30-Jun-16	Increase in revaluation of the Buildiing					$    3,50,000
30-Jun-16	Fair Value of the Building					$ 31,00,000
30-Jun-17	Depreciation		for 1 year		77500	$ 30,22,500
30-Jun-17	Decrease in revaluation of Building					$    5,22,500
30-Jun-17	Fair Value of the Building					$ 25,00,000
	Assumption if buidling value was $3,100,000 Journal entries
30-Jun-16	Building	350000
	Revaluation surplus		350000
	to record the revaluation from 2750000 to 3100000
30-Jun-17	Depreciation	77500
	Accumulated Depreciation		77500
	To record Depreciation = 3,100,000/40 years
	Assumption if buidling value was $2,500,000 Journal entries
30-Jun-17	Impairment Loss	522500
	Building		522500
	Assumption
	Building Value	3000000
	Accumulated depreciation	-360000
		2640000
	Balance Valued at	2900000
	Revaluation Surplus =2900000-2640000	260000
	Now: the Value of Building	2900000
	Building sold	3000000
	gain on sale of building	100000
	Next: Buildling Sold for	$ 30,00,000
	Cash received	1000000
	The purchaser paid with a $2,000,000 two year promissory note (9% rate)	$ 20,00,000
	Interest @ 9% for First Year on $2000000	$    1,80,000
	Interest @ 9% for Second Year on $2000000	$    1,80,000
	Total Interest Income	$    3,60,000
	Joural entries:
	Depreciation	360000
	Accumulated Depreciation		360000
	Building	260000
	Revaluation surplus		260000
	Accumulated Depreciation	360000
	Building		360000
	Building	100000
	Gain on Sale of Building		100000
	Cash	1000000
	Note Receivable	2000000
	Building		3000000
	Cash	180000
	Interest received		180000
	To record interest received for 1st year
	Cash	180000
	Interest received		180000
	To record interest received for 2nd year
	Cash	2000000
	Note Receivable		2000000