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Verge was given a building by a private individual in February 2012. The benefactor
included a condition that it must be brought into use as a train museum in the
interests of the local community or the asset (or a sum equivalent to the fair value of
the asset) must be returned. The fair value of the asset was $1.5 million in
February 2012. Verge took possession of the building in May 2012. However, it could
not utilise the building in accordance with the condition until February 2013 as the
building needed some refurbishment and adaptation and in order to fulfil the
condition. Verge spent $1 million on refurbishment and adaptation.SOLUTION:
The following transactions need to be made to recognise the
asset in the entity’s statement of financial position as of 31 March 2013.
Dr Property, plant and equipment $2.5m
Cr Profit or loss $ 1.5m
Cr Cash/trade payable $1mI dont understand why cash and profit and loss are credited…
I’d appreciate if someone could help by explaining the logic behind the treatmentWell I would guess that cash is credited as “Verge spent $1 million on refurbishment and adaptation”.
The obvious debit entry is PPE and as this is a property gain, not a revalutaion, the gain is recorded in the SPL rather than the OCI and revalutation reserve, in much the same way if you were to dispose of the asset you’d recognise the gain/loss in the SPL.
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