- 10 Marks
FR – L2 – Q22 – Property, Plant and Equipment
Question
The following information relates to the financial statements of Accra Enterprises Limited for the year to 31 March 20X4.
The head office of Accra Enterprises Limited was acquired on 1 April 20X1 for GH¢1million. Accra Enterprises Limited intend to occupy the building for 25 years. On 31 March 20X3 it was revalued to GH¢1.15 million. On 31 March 20X4, a surplus of vacant commercial property in the area had led to a fall in property prices and the fair value was now only GH¢0.8 million.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
Answer
IAS 16 permits assets to be carried at cost or revaluation. Where the latter is chosen, the asset must be stated at its fair value.
The original depreciation was GH¢40,000 (GH¢1,000,000 / 25 years) per annum.
On 31st March 20X3 the asset is two years old. Its carrying amount before revaluation was therefore GH¢1 million less accumulated depreciation of GH¢80,000 (2/25 × GH¢1 million).
| GH¢ | |
|---|---|
| Cost/valuation | 1,000,000 |
| Accumulated depreciation | (80,000) |
| Carrying amount | 920,000 |
In order to effect the revaluation, the cost is uplifted to fair value of GH¢1.15m, the accumulated depreciation is eliminated, and the uplift to the carrying amount is credited to a revaluation surplus account.
| Debit | Credit | |
|---|---|---|
| Cost/valuation | 150,000 | |
| Accumulated depreciation | 80,000 | |
| Revaluation surplus | 230,000 |
The impact of the journal is as follows:
| Before | Adjusting | After | |
|---|---|---|---|
| Cost/valuation | 1,000,000 | 150,000 | 1,150,000 |
| Accumulated depreciation | (80,000) | 80,000 | nil |
| Carrying amount | 920,000 | 1,150,000 |
The asset is depreciated over its remaining useful economic life of 23 years giving a charge of GH¢50,000 (GH¢1,150,000 / 23 years) per annum in the year to 31st March 20X4.
| Statement of profit or loss | Debit | Credit |
|---|---|---|
| Accumulated depreciation | 50,000 | |
| 50,000 |
This results in a carrying amount as at 31st March 20X4 of:
| GH¢ | |
|---|---|
| Cost/valuation | 1,150,000 |
| Accumulated depreciation | (50,000) |
| Carrying amount | 1,100,000 |
Transfer from revaluation surplus to retained earnings.
As a result of the revaluation, the annual depreciation has increased from GH¢40,000 to GH¢50,000. This extra depreciation of GH¢10,000 is transferred from the revaluation reserve to accumulated profits each year.
| Debit | Credit | |
|---|---|---|
| Revaluation surplus | 10,000 | |
| Accumulated profits | 10,000 |
By the 31st March 20X4, the balance remaining on the revaluation reserve will be GH¢220,000.
| GH¢ | |
|---|---|
| Surplus recognised at 31 March 20X3 | 230,000 |
| Transfer to accumulated profits | (10,000) |
| Carrying amount | 220,000 |
The fall in property values at the year-end. The asset must be revalued downwards to GH¢0.8 million, a write-down of GH¢300,000.
GH¢220,000 of this is charged against the revaluation reserve relating to this asset, and the remaining GH¢80,000 must be charged against profits.
The reduction of the carrying amount of the asset is achieved by removing the accumulated depreciation and adjusting the asset account by the balance.
| Debit | Credit | |
|---|---|---|
| Revaluation surplus | 220,000 | |
| Statement of profit or loss | 80,000 | |
| Asset at valuation | 350,000 | |
| Accumulated depreciation | 50,000 |
The impact of the journal is as follows:
| Before | Adjustment | After | |
|---|---|---|---|
| Cost/valuation | 1,150,000 | 350,000 | 800,000 |
| Accumulated depreciation | (50,000) | 50,000 | nil |
| Carrying amount | 1,100,000 | 800,000 |
This balance is depreciated over the remaining useful life of the asset (22 years).
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