- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
- Topics: 1
- Replies: 0
- ☆
Hello,
I have been stuck with the following points.
Revenue includes an amount of $16 million for a sale made on 1 April 2015. The sale relates to a single product and includes ongoing servicing from Downing Co for four years. The normal selling price of the product and the servicing would be $18 million and $500,000 per annum ($2 million in total) respectively.
Due to rising property prices, Downing Co decided to revalue its land and buildings on 1 April 2015 to their market value. The values were confirmed at that date as land $16 million and buildings $52·2 million with the buildings having an estimated remaining life of 18 years at the date of revaluation. Downing Co intends to make a transfer from the revaluation surplus to retained earnings in respect of the annual realisation of the revaluation surplus. Ignore deferred tax on the revaluation.Plant and equipment is depreciated at 15% per annum using the reducing balance method.
During the current year, the income from royalties relating to the patent had declined considerably and the directors are concerned that the value of the patent may be impaired. A study at the year end concluded that the present value of the future estimated net cash flows from the patent at 31 March 2016 is $3·25 million; however, Downing Co also has a confirmed offer of $3·4 million to sell the patent immediately at that date.
No depreciation/amortisation has yet been charged on any non-current asset for the year ended 31 March 2016. All depreciation/amortisation is charged to cost of sales.I have tried to get the journal entries. however, when I put them into my statement of financial position along with my other numbers the top and bottom do not match. I was wondering if I could get help with the journal entries for the notes above.
1) The patent: the value following an impairment review should be the lower of carrying value when comared with the higher of value in use and net realisable value
For the patent, the sale price / offer received of $3.4 exceeds the value in use $3.25 so it’s the $3.4 that we compare with carrying value
Was it a sense of fun or just pure devilment that you have chose not to tell me the carrying value of the patent? According to the question that had to look up, the carrying value brought forward as at 31 March 2015 was $4,500 ($7500 – $3,000) so we need to amortise that figure for a further year to arrive at carrying value immediately before the impairment review so a further $750 need to be amortised
That leaves us with a carrying value of $3,750 and that figure exceeds the recoverable amount by $350 ($3,750 – $3,400)
So we need to impair for 2016 a further $350 to add to this year’s amortisation amount of $750 = a total write-off for the patent of $1,100
2) The ongoing service contract: the total revenue recognised according to note (i) in the question is $16 million and that compares with a “normal” sale price of $20 million ($18 million for the sale + $2 million for the service agreement)
A price of $16 million represents a discount on “normal” terms of 20% ($16 is 80% of $20)
Applying this discount to the various elements of the contract we arrive at $14.4 million for the sale and $1.6 million for the service element = $400,000 for each of 4 years
At the year end we have earned 1 year’s worth of revenue from the service agreement and that means that we should defer 3 years’ worth of those deferred service revenues
So we need to remove 3 x $400,000 = $1.2 million from revenue
Therefore reduce revenue by $1.2 million and classify the $1.2 million that we have just removed as a current liability $400,000 and a deferred non-current liability $800,000
3a) Land: the carrying value of the land brought forward and as at date of revaluation was $14 million and this is to be revalued to $16 million … so that’s easy – an increase of $2 million
3b) Buildings: the carrying value of the buildings brought forward and as at date of revaluation was $45 million ($50 million cost less $5 million depreciation) and this is to be revalued to $52.2 million = an increase of $7.2 million
The building is to be depreciated over 18 more years so this year’s depreciation is $52.2 / 18 = $2.9 million
That increase of $7.2 now needs to be released from Revaluation Reserve over 18 years (the annual transfer) and that equals $7.2 million / 18 = $400,000
In summary:
Patent amortisation $750,000 Dr PorL Cr Accumulated Patent amortisation
Patent impairment $350,000 Dr PorL Cr PatentContract sales revenue $1.2 million reduction Dr Revenue Cr Current liabilities $400,000 and non-current liabilities $$800,000
Land revaluation increase $2 million Dr Land Cr Revaluation reserve
Building revaluation increase $7.2 million Dr Building Cr Revaluation reserveAnnual transfer $400,000 Dr Revaluation reserve Cr Retained earnings
Building depreciation $2.9 million Dr PorL Cr Building accumulated depreciationIs that better?
- The topic ‘acca f7 2016 help’ is closed to new replies.