Question

Almirall uses the straight-line method to depreciate its property, plant & equipment. Almirall has four PP&E categories: (1) land, (2) buildings, (3) machinery & equipment, and (4) furniture & fixtures. The buildings were purchased on January 3, 2017 for $4,000,000, have an estimated useful life of 25 years and an estimated residual value of $500,000. The company elected the revaluation model under IAS 16 to determine the carrying value of its buildings subsequent to acquisition.

In January 2018, the building was appraised, and was determined to have a fair value of $4,628,000. There was no change in the estimated useful life or residual value of the building. Almirall determined that a new appraisal was not warranted at December 31, 2018. Almirall uses the historical cost method for all other categories of PP&E.

Answer 1

Solution: Here Almirall is using Fair value method for recording buildings, wherein buildings will not be recorded at the historical cost at which they were purchased but the carrying cost will be adjusted time and again to depict their fair value.

- Depreciation for the year ended 2017:

Depreciation as per straight-line method = (Purchase price - Salvage value)/ Useful life

= 40,00,000- 5,00,000/ 25

= 1,40,000 $

- Revised Depreciation for the year ended 2018 And the years ahead:

Revised Depreciation as per straight-line method = (Fair value as on the date of revaluation - Salvage value)/ Useful life

= 46,25,000- 5,00,000/ 24

= 1,71,875 $

- Note: The journal entry on the date of revaluation will be as follows:

Note: It is assumed that the financial year in the given question is the calendar year, due to lack of instruction in the same respect.