Question

The top image is the question, the bottom image is the answer.

Within the answer, in working 1 (W1) Revaluation where did they get the cost from as well as the SOPOL OCI-Revaluation gain figure from?

And why do we CR cost for machine 2 and not DR like machine 1?

Q6 POLSON LTD Polson Ltd has supplied you with information about the two factory machines that they own: Machine 1 Machine 2 Depreciation policy Straight line 8 years Straight line 6 years Estimated useful life £000 £000 Cost on 1 September 2016 Accumulated depreciation (2 years) 240,000 120,000 (40,000) (60,000) Carrying amount on 31 August 2018 180,000 80,000 Revaluation details: Revalued amount 264,000 112,000 5 years Revised estimated remaining useful life 6 years The revaluation was performed by an external qualified engineer, Diane Walsh from Engineering Values Ltd, on 1 September 2018. Polson Ltd has never revalued any assets before but has decided to make an annual transfers from its revaluation surplus to retained earnings in respect of excess depreciation. Required (a) Prepare extracts from Polson Ltd's financial statements for the year ended 31 August 2019 showing the effect of the revaluation of the machines. Produce the note to the financial statements for non-current assets (in so far as the (b) information allows) showing a separate column for each machine. (20 marks)

Answer 1

The steps involved in accounting for revaluation of non-current asset include:

1. Adjusting the cost of asset to fair market value.

2. Eliminating accumulated depreciation of asset being revalued.

3. Recognize revaluation gain or loss.

These three steps have been followed in the revaluation entries for both machine 1 and machine 2, explained as under:

1. Adjusting cost of asset to fair market value:

For machine 1, Fair Market Value - Cost

= 264,000 - 240,000 = 24,000 increase (Machine 1 account being real account so increase =. debit with 24,000)

For machine 2, Fair market value - Cost

= 112,000 - 120,000 = 8,000 decrease (Since value has decreased and machine being a real account, Machine 2 account credited with 8000)

2. Eliminating accumulated depreciation :

For machine 1, accumulated depreciation 60,000 to be debited

For machine 2, accumulated depreciation 40,000 to be debited

3. Recognize revaluation gain or loss:

This step involves comparison of fair market value with carrying value to calculate revaluation gain or loss. Further, revaluation gain is not ordinary gain recorded in income statement.It is recorded as Other comprehensive income in balance sheet. Further, gain being a nominal account is credited and loss is debited.

For machine 1, Fair market value - Carrying value

= 264,000 - 180,000 = 84,000 revaluation gain (credit)

For machine 2, Fair market value - Carrying value

= 112,000 - 80,000 = 32,000 revaluation gain (credit)

Combining these three steps for each machine gives us the revaluation entries given in the solution, i.e.,

For machine 1,

Dr. Cost 24,000

Dr. Acc. Dep. 60,000

Cr.SOPOL-OCI reval. gain 84,000

For machine 2,

Dr. Acc. dep 40,000

Cr. Cost 8,000

Cr. SOPOL-OCI reval. gain 32,000