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Good afternoon Mike,
I’m doing the mini excercises related with the non current assets and I have come questions:
* Question 1: Why in the answer there is an entry debiting in revaluation reserve and crediting S of CI for 1,000?
* Question 2: Why do we debit on revaluation reserve account? I mean if previously we haven’t had any revaluation surplus can this account still be used? or better to use an expense account (in the case we haven’t had any revaluation surplus from past periods)?
* Question 3: I don’t understand the journal entry related with the investments in which we debit 1,000 to investments @ Fair value and credit S of CI
*Question 6: I’m not following the reason for the last entry where there is a debit of 2,500 on amortization (cos) and a credit for the same amount on accum amortization (brand)
Thanks for the clarification!
“Why in the answer there is an entry debiting in revaluation reserve and crediting S of CI for 1,000” The building was revalued by $35m and had a remaining useful life of 35 years. So depreciation expense in the PorL would be $1m greater than if the building had not been revalued. Why should this year’s profits and therefore retained earnings “suffer” by this excess depreciation expense? So an annual transfer has been taken from the Revaluation Reserve to Retained Earnings to compensate for this additional $1m extra depreciation.
This is not some requirement by any IAS / IFRS – but is seen as good practice
“Why do we debit on revaluation reserve account? I mean if previously we haven’t had any revaluation surplus can this account still be used? or better to use an expense account (in the case we haven’t had any revaluation surplus from past periods)?”
Extract from the question “Llama has a policy of revaluing its land and buildings at each year end.”
I’m not sure when the value of land last fell – certainly not in my lifetime! This suggests that there exists a Revaluation Reserve
“I don’t understand the journal entry related with the investments in which we debit 1,000 to investments @ Fair value and credit S of CI”
Extract from the question “The investments at fair value through profit and loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 2008 the relevant index was 1,200 and at 31 March 2009 it was 1,296.”
The index has risen by 96 from a base figure of 1,200. That’s an increase of 8% The investments were $12,500 and have increased in line with that index by 8%
8% of $12,500 is $1,000
OK now?
“I’m not following the reason for the last entry where there is a debit of 2,500 on amortization (cos) and a credit for the same amount on accum amortization (brand)”
Prior to the impairment review, the brand was being amortised at $3,000 each year. After 6 months this year there was a review. So amortisation for the first 6 months was $1,500. That brought the carrying value down to $19,500 from the brought forward amount of $21,000
The review took place and recoverable amount was $15,000 with a three year life – so $5,000 each year amortisation. The impairment to bring carrying value down from $19,500 to $15,000 required a $4,500 expense.
Now amortise for the last 6 months at the rate of $5,000 per year and there’s your $2,500
OK?
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