Question

Financial accounting

On 1 July 2015 Brush Ltd acquired a new building at a cost of $1,200,000 for the storage of inventory. The useful life is estimated to be 12 years and the expected residual value is zero. The building is depreciated on a straight-line basis. Brush Ltd makes the following estimates of the value of the building: Net selling price Value in use Fair value Building $1,110,000 $1,100,000 $1,095,000 30 June 2016 $980,000 | $1,080,000 $960,000 30 June 2017 REQUIRED (a) Assume that Brush Ltd uses the cost method as per AASB 116 Property, plant and equipment. Complete the impairment test on the building on 30 June 2016 and on 30 June 2017 and provide the necessary journal entries based on the results of the impairment test for the year end 2016 and 2017 (b) Assume that Brush Ltd uses the fair value method as per AASB 116 Property, plant and equipment and it revalue the building at the end of each year Prepare the journal entries relative to the revaluation of the building for year ending 30 June 2016 and 2017. (NOTE: pay particular attention to the nature of the asset and ignore tax effects) (c) Based on your response at point b), explain why the treatment of a revaluation increment is considered asymmetric and conservative with respect to the treatment of a revaluation decrement

Answer 1

Calculation of carrying amount of Building
Date	Depreciation	Closing net book value
01-Jul-15		$     12,00,000
30-Jun-16	$          1,00,000	$     11,00,000
30-Jun-17	$          1,00,000	$     10,00,000

Impairment loss

Carrying amount- Recoverabe amount

Recoverable amount

Higher of net selling price and value in use

	Carrying amount	Net selling price	Value in use	Recoverable amount	Impariment loss
30-Jun-16	$        11,00,000	$     11,10,000	$        10,95,000	$   11,10,000	No imparment
30-Jun-17	$        10,00,000	$       9,80,000	$          9,60,000	$     9,80,000	20,000

As on 30-Jun-16 since the recoverable amount is more than the carrying amount, there is no impairment of the asset.

Journal Entries

30-Jun-16
	No Journal Entry

(a)

30-Jun-17
	Impairment loss	$           20,000
	Building		$              20,000
	(Impairment loss recognized)

(b)

Calculation of revaluation surplus/(loss)

	Fair value	Carrying amount	Revaluation surplus/(loss)
30-Jun-16	$        11,00,000	$     11,00,000	$                       -
30-Jun-17	$        10,80,000	$     10,00,000	$              80,000

30-Jun-16
	No Journal Entry

30-Jun-17	Building	$           80,000
	Revaluation surplus		$              80,000
	(To record revaluation increase and transferred to revaluation surplus)

C)

Revaluation decrease will be charged to profit and loss.

Revaluation surplus will be shown in other comprehensive income without showing as income in profit & loss. This is based on conservative principle and in future, if there is any downward revaluation, it will be debited to revaluation surplus.