Question

QUESTION 1

Richy Limited has plant that cost R 345 000 on 01 January 2016. Installation and modification costs   R 69 000 (including vat). Transfer costs paid to lawyer amounted to R 20 000. Transport costs for bringing the asset to location amounted to R 20 000. The plant was ready for use on 01 January 2016. The machines were cleared on 01 March 2016 at a cost of R 10 000. Due to the low order levels in April 2016 the plant stood idle. Depreciation is provided over its useful life of 5 years using the straight-line method to a nil residual value. Richy Limited measures plant under the revaluation model.

The plant was revalued as follows:

• 31 December 2016 R 310 000
• 31 December 2017 R 300 000
• 31 December 2018 R 250 000

Richy Limited transfers the maximum amount from the realized portion of the revaluation surplus to equity. VAT must be calculated at 15%.

Required:

Disclose the above information in the notes to the financial statements for years ending 2016, 2017 and 2018. (Include in your answer the journal entries that must be recorded in the journal.)

Answer 1

Journal Entries

01-01-2016   Plant Dr R 60,000

Input Vat Dr R 9,000

  Plant Dr R 20,000

Plant Dr R 20,000

To Payables Cr R 109,000

(Being installation&modification cost, Lawyer cost and Transport cost capitalized, exclude Vat @15%)

01-03-2016 Plant Dr R 10,000

To Bank Cr R 10,000

(Being clearing cost also capitalized, added into plant cost)

31-12-2016 Depreciation Dr R 90,666.66

To Accumulated Depreciation Cr R 90,666.66

(Being depreciation charged for year 2016)

31-12-2016 Other Comprehensive Income Dr R 54,333.34

To revaluation surplus Cr R 54,333.34

(Being revaluation of assets decreases the value of plant, report to OCI)

31-12-2017 Depreciation Dr R 91,000

To Accumulated Depreciation Cr R 91,000

(Being depreciation charged for year 2017)

31-12-2017 Revaluation surplus Dr R 26,666.67

Equity Cr R 26,666.67   

(Assets revalued at higher value)

31-12-2018 Depreciation Dr R 91,000

To Accumulated Depreciation Cr R 91,000

(Being depreciation charged for year 2018)

31-12-2018 Revaluation surplus Dr R 67,666.66

Equity Cr R 67,666.66   

(Assets revalued at higher value)

Notes to the financial statement

1. Cleared cost is much higher so that capitalized that amount with plant cost on March 01, 2016

2. Depreciation calculated on 2016- Plant cost divided by 5 estimated useful life (R 10,000 reported only 10 months)

3. If revaluation of Assets increase (revaluation surplus), it should be reported to Equity accounts, if assets value decreases report to OCI as expense.

4. Book value of Asset 2017 R 273,333.34 so that if we compare with fair value of the asset fair value of the asset is R 300,00 so that surplus of R 26,666.66, transfer to Equity.

5. Book value of Asset 2018 R 182,333.34 so that if we compare with fair value of the asset fair value of the asset is R 250,00 so that surplus of R 67,666.66, transfer to Equity.