Question

Question 3 28 marks On 1 July 2017, Guinness Ltd acquired two assets within the same class of plant and equipment for cash. Information on these assets is as follows. Cost (S) Expected Useful Life Machine A 100,000 5 years Machine B 60,000 3 years The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is accounted for subsequent to acquisition using the revaluation model. At 30 June 2018, information about the assets is as follows. Fair Value (SS) Machine A 84,000 Machine B 38,000 On 1 January 2019, Machine B was sold for $29 000 cash. At 30 June 2019, information on the machines is as follows. Fair Value (S) Expected Useful Life Machine A 58,000 3 years Required: a) Prepare the journal entries in the records of Guinness Ltd to record the events for the year ended 30 June 2018. [15 marks] b) Prepare journal entries to record the events for the year ended 30 June 2019. [13 marks]

Answer 1

Answer) Step 1- Compute the carrying value of the asset before revaluation

Depreciation for Machine A is 100,000/5 = 20000

Depreciation for Machine B is 100,000/5 = 20000

Carrying value of assets is Machine A is 80,000 and Machine B is 40000

Step 2 - Computation of Revaluation gain or loss on both the assets.

Machine is upward revaluated by $4000 and machine B is downward revaluated by $2000

Step 3- Journal entries

a. Machine A A/c $4000 Debit

To Revaluation reserve A/c $4000 credit

(Being upward revaluation done based on fair value.)

b. Revaluation loss A/c $2000 Debit

To Machine B A/c $2000 Credit

(Being downward revaluation done) The revaluation loss will be taken to profit and loss account later

Step-4 journal entries for on 01st January 2019

a. Loss on sale of asset A/c $9000

Cash A/c $29000 Debit

To Machine B A/c $38000

(Being machine sold and loss on sale of asset recognized) the loss will be taken to profit and loss account later

Step-5 Journal entries on 30 June 2019

a. Depreciation A/c Debit $21000 (current carrying value divided by remaining useful life i.e 84000/4)

To Machine A $ 21000

b. Current carrying value of the asset is $84000- $21000 is $63000

Revaluation loss is $63000-$58000= $5000. 4000$ is set of with previously revaluation gain and $1000 will be loss on revaluation which is taken to profit and loss account

Step 6 Revaluation entry

Loss on revaluation A/c $1000 debit

Revaluation reserve A/c $4000 debit

To Machine A A/c $5000 credit