Question

On 30 June 2019, Grove Ltd adopted the revaluation model to measure equipment. Due to the revaluation carried out on 30 June 2019, Grove Ltd recognised a gain on revaluation of $30,000 for the one item of equipment listed in this class. After recording depreciation expense on equipment for the year ended 30 June 2020, and writing the equipment down to its carrying amount of $325,000, Grove Ltd obtained the fair value of $285,000 as at 30 June 2020 for the equipment. The next journal entry required to record the revaluation for equipment on 30 June 2020 is: Select one: O a. DR Gain on revaluation (OCI) 30,000 CR Equipment 30,000 Ob. DR Loss on revaluation (P/L) 40,000 CR Equipment 40,000 OC. DR Equipment 40,000 CR Gain on revaluation (OCI) 30,000 CR Loss on revaluation (P/L) 10,000 d. DR Loss on revaluation (OCI) 30,000 DR Loss on revaluation (P/L) 10,000 CR Equipment 40,000

Answer 1

The answer of the 1st question is (d) DR Loss on revaluation (OCI) 30,000 DR loss on revaluation (P/L) 10,000 CR Equipment 40,000

Explanation:

When the company adopts Revaluation model for the recognition of Property, Plant and Equipment, then the Revaluation Gain should be credited to Other Comprehensive Income (OCI) and Revaluation loss for the first time should be debited to Profit and Loss Account. If there is Revaluation Gain in one year which is transferred to OCI and then if there is Revaluation Loss in subsequent year, then such loss should first be adjusted against the Revaluation Gain in OCI and remaining loss should only be debited to Profit and Loss Account.

In the present case, on 30 June, 2019 Grove Ltd had recognised the gain on revaluation of $30,000 for the one item of equipment.

On 30 June, 2020 the carrying amount of equipment was $325,000 whereas the fair value of equipment was $285,000, resulting in revaluation loss of $40,000 ($325,000 - $285,000).

As explained above, from this loss of $40,000, loss of $30,000 would be adjusted against OCI and remaining $10,000 would be charged to Profit and Loss Account as Loss on revaluation of equipment.

All other answers except (d) are wrong as they do not show the above effect in the entry.

The answer of the 2nd question is (c) $14,000

Explanation:

On 1 August 2019, the cost of vehicles was $16,000 having useful life of 4 years and no residual value.

Depreciation for the period August 1 2019 to June 30 2020:

Depreciation = (Cost - Residual Value)/Useful life

Depreciation = ($16,000 - $0)/4

Depreciation = $16,000/4 = $4,000.

Therefore, the carrying amount of the vehicles as on June 30 2020 = Cost - Depreciation = $16,000 - $4,000 = $12,000.

On August 1 2020, the company incurred $3,000 in costs to replace parts, extending its useful life by 2 years and giving it a residual value of $1,000.

A resource which gives future economic benefit to the company, which is used in either manufacturing of the goods of the company or sales of the company and which is owned or controlled by a company then it is called an Asset for the company.

As due to the replacement of parts of vehicles, the useful life of vehicle is extended by 2 years, hence the cost of replacement should be capitalised.

New Cost of Vehicle as on August 1 2020:

= Carrying value of vehicle as on June 30 2020 + Cost of replacement

= $12,000 + $3,000

= $15,000.

The depreciable amount of the Vehicle would be,

Depreciable Amount = New Cost - Residual Value

Depreciable Amount = $15,000 - $1,000

Depreciable Amount = $14,000.

All other options are incorrect as they do not show the answer as derived above.