1 ACC201 – Financial AccountingACC201 – Revision Questions and SolutionsWeek 65.1 – On 1 January 2016, Lima Ltd revalued land from $100 000 to $200 000. On 1 January 2017, thecompany subsequently revalued the land to $160 000. And on 1 January 2018, the company againrevalued the asset downwards to $80 000.Required1. Prepare the journal entries required to record the revaluation adjustment for the yearended 30 June 2016.2. Prepare the journal entries required to record the revaluation adjustment for the yearended 30 June 2017.3. Prepare the journal entries required to record the revaluation adjustment for the yearended 30 June 2018.1. 30 June, 2016 LandDr100 000Gain on revaluation (OCI)Cr100 000(Revaluation of Land from $100 000 to $200 000)Gain on revaluation of Land (OCI)Dr100 000100 000Asset revaluation surplus – Land (AccumulationCrof revaluation gain in equity)2. 30 June, 2017Loss on revaluation (OCI)Dr40 000 LandCr40 000(Revaluation of land from $200 000 to $160 000, partially reversing a revaluation increase)Asset revaluation surplus – LandDr40 000Loss on revaluation of Land (OCI)(Accumulation of revaluation loss in equity)3. 30 June, 2018Loss on revaluation (OCI)Cr40 00060 000DrLoss on revaluation (P&L)Dr20 000LandCr80 000(Revaluation of land from $160 000 to $80 000, partially reversing a revaluation increase, andrecognising a further decrease beyond the original accounting value)Asset revaluation surplus – LandDr60 000Loss on revaluation of Land (OCI)(Accumulation of revaluation loss in equity)Cr60 000 2 ACC201 – Financial Accounting5.11 – In the 30 June 2016 annual report of Emu Ltd, the equipment was reported as follows: Equipment (at cost)500 000Accumulated depreciation150 000350 000 The equipment consisted of two machines, Machine A and Machine B. Machine A had cost$300 000 and had a carrying amount of $180 000 at 30 June 2016, and Machine B had cost$200 000 and was carried at $170 000. Both machines are measured using the cost model, anddepreciated on a straight-line basis over a 10-year period.On 31 December 2016, the directors of Emu Ltd decided to change the basis of measuring theequipment from the cost model to the revaluation model. Machine A was revalued to $180 000 withan expected useful life of 6 years, and Machine B was revalued to $155 000 with an expected usefullife of 5 years.At 1 July 2017, Machine A was assessed to have a fair value of $163 000 with an expected usefullife of 5 years, and Machine B’s fair value was $136 500 with an expected useful life of 4 years.Required1. Prepare journal entries to record depreciation during the year ended 30 June 2017,assuming there was no revaluation.2. Prepare the journal entries for Machine A for the period 1 July 2016 to 30 June 2017 on thebasis that it was revalued on 31 December 2016.3. Prepare the journal entries for Machine B for the period 1 July 2016 to 30 June 2017 on thebasis that it was revalued on 31 December 2016.4. Prepare the revaluation journal entries required for 1 July 2017.5. Accordingto accounting standards,onwhat basismaymanagementchangethe methodof assetmeasurement, for example from cost to fair value?EMU LTD1.30 June, 2017Depreciation expense – Machine AAccumulated depreciationDrCr30 00030 000(10% x $300 000)Depreciation expense – Machine BAccumulated depreciationDrCr20 00020 000(10% x $200 000)2.31 December, 2016Depreciation expense – Machine A Dr 15 000Accumulated depreciation Cr 15 0003 ACC201 – Financial Accounting(1/2 x 10% x $300 000)Machine A Cost300 000Accum. depreciation135 000165 000Fair value180 000Increment15 000 Accumulated depreciation – Machine AMachine A(Writing the asset down to carrying amount)DrCr135 000135 000Machine AGain on revaluation of machinery (OCI)DrCr15 00015 000(Revaluation of machine from $165 000 to $180 000)Gain on revaluation of machinery (OCI) Assetrevaluation surplus – Machine ADrCr15 00015 000(Accumulation of net revaluation gain in equity) 30June, 2017Depreciation expense – Machine A Dr 15 000Accumulated depreciation Cr 15 000(1/2 x $180 000/6yrs)3.31 December, 2016Depreciation expense – Machine B Dr 10 000Accumulated depreciation Cr 10 000(1/2 x 10% x $200 000)Machine B Cost200 000Accum. depreciation40 000160 000Fair value155 000Decrement5 000 Accumulated depreciation – Machine BMachine B(Writing the asset down to carrying amount)DrCr40 00040 000Loss – revaluation decrement (P/L)Machine BDrCr5 0005 0004 ACC201 – Financial Accounting(Revaluation of machine from $160 000 to$155 000)30 June, 2017Depreciation expense – Machine B Dr 15 500Accumulated depreciation Cr 15 500(1/2 x $155 000/5yrs)4. Machine A$Revalued180 000Accum. Deprec15 000Carrying amount165 000Fair value163 000Decrement2 000 Machine B $Revalued 155 000Accum. Deprec 15 500Carrying amount 139 500Fair value 136 500Decrement 3 000Accumulated depreciation – Machine AMachine A(Writing down to carrying amount)DrCr15 00015 000Loss on revaluation of machinery (OCI)Machine A(Revaluation downwards)DrCr2 0002 000Asset revaluation surplus – Machine ALoss on revaluation of machinery (OCI)(Reduction in accumulated equity dueto revaluation decrement)DrCr2 0002 000Accumulated depreciation – Machine BMachine B(Writing down to carrying amount)DrCr15 50015 500Loss – revaluation decrement (P/L)Machine BDrCr3 0003 000(Writing down to fair value)5. Basis for change in accounting policyConsider the cost basis method and the fair value method in relation to the relevance and reliability ofinformation.Current information is generally more relevant than past information. Determination of cost isgenerally more reliable than determination of fair value.5 ACC201 – Financial AccountingConsider the trade-off between relevance and reliability, that is, as information becomes less reliableit also loses its relevance. A fair value measure may, because of its timeliness, be more relevant but ifthe measure becomes more unreliable, the relevance of the information decreases.
