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Dear tutor,
About question 1 on Sep/Dec 2015 – note no. 4
The question mentioned about the exchange of asset where Bubble exchanged land to overseas ppty. The problem here is the overseas ppty with a FV of DN 58.5m as at 01/05/2015 with ex rate was 1$ = 9DN meaning its FV equivalent to $ 6.5m (DN58.5m : 9)
meanwhile, the land with FV of $7m was a part of the exchange transaction
As my thinking:
The 1st journal entry here, the land ‘s CV is $5m while its FV of $7m, that means we have gain on revaluation of the land of $2m then this amount will go to OCE (under IAS 16)The 2nd one, overseas ppty with FV of $6.5m was exchanged with land which have FV of $7m, and Bubble was unsure about this transaction, therefore we have
Dr PPE $5m
Dr investment ppty $1.5m
Dr loss on exchange of land $0.5m (it will go to RE)
Cr Land $7mHowever, the answer is not what i though, it didn’t take into account of separating overseas ppty into PPE & investment ppty (explain for me this point???)
Then it stated that overseas which clearly had FV of $6,5m should be valued at $7m
(explain for me this point)What do u think about my way? did i misunderstand the content or what??
Hi,
I think you’ve slightly misunderstood it as the overseas valuation is not entirely relevant in this scenario as the fair value of the property is equivalent to the fair value of the land given up at $7m as the transaction has commercial substance. All this means it that by giving away land worth $7m in exchange for the property we believe the property is worth $7m. If you’d have paid $7m in cash as opposed to giving the land then this would be the fair value of our new property wouldn’t it, just because it is land exchanged doesn’t mean that it is any different.
You don’t need to separate out the new property into PPE and IP as it is fully PPE given it is for the expansion of our operations so will be part of our normal operations.
Thanks
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