MAA 716 Financial Accounting

WRITTEN ASSIGNMENT TRIMESTER 1, 2014

PART 1 QUESTION 1

QUESTION 1
On 1 July 2011, Hawks Ltd acquired land for $1 500 000 and machinery for $ 1 000 000. Hawks
Ltd uses cost model to account land and revaluation model to account for machinery. Hawks Ltd
depreciated the machinery over its useful life of four years, using straight-line method. Disposal
value at the end of useful lifetime was assessed as Zero.
The following information concerning the asset measurement was available.
Detail

Fair Value

Cost of Diposal

Value in Use

$ 1 250 000

$100 000

$1 200 000

Nil

Nil

$75 000

$1 200 000

30 June 2012
Land
Machinery

1 100 000

30 June 2013
Land
Machinery

$ 1 200 000
700 000

Nil

Nil

30 June 2014
Land
Machinery

$ 1 400 000
300 000

$100 000
Nil

$1 500 000
Nil

Indicators of impairment and/ or reversal of impairment existed at relevant dates for land only.

Required:
1.a)

Prepare general journal entries in the books of Hawks Ltd over the period from, 1 July

2011 to 30 June 2014, in accordance with the requirements of AASB 116 Property plant
and Machinery and AASB 136 Impairment of Assets (Ignore the tax effect).
LAND:
Value on 1 July 2011 = $ 1 500 000
30 June 2012
Fair Value = $ 1 250 000
Costs of Disposal = $ 100 000
Value in Use = $1 200 000
Realisable Value = Higher of an Assets Fair Value minus its Costs of Disposal and its
Value in Use. (AASB 116)
Fair Value Costs of Disposal = $1 250 000 100 000
= $1 150 000
Realizable Value is its Value in Use as it is higher than the Fair Value Minus Costs of
Disposal.
Impairment Loss = $1 500 000 1 200 000
= $300 000
30 June 2013
Fair Value Costs of Disposal = $1 200 000 75 000
= $1 175 000
Value in Use = $1 200 000
Carrying Amount = $1 200 000 ( Value in Use on 30 June 2012)
Impairment Loss = $1 200 000 1 200 000
= $00
30 June 2014
Fair Value Costs of Disposal = $1 400 000 - $100 000
= $1 300 000
Value in Use = $1 500 000
Recoverable Amount = Value in Use = $1 500 000

Impairment Loss = $1 500 000 1 200 000

= $300 000
DATE
1 July 2011
30 June

PARTICULARS
Land
Cash
Impairment Loss Land

DEBIT($)
1 500 000

CREDIT($)

1 500 000
300 000

2012
Accumulated Impairment Cost - Land
30 June

300 000

No Journal Entry Required

2013
30 June

Accumulated Impairment Cost Land

300 000

2014
Reversal of Previous Impairment Loss Land
Machinery
Value at 1 July 2011 = $1 000 000
30 June 2012
Realisable Amount = $1 100 000
Revaluation Gain = $1 100 000 1 000 000
= $100 000
30 June 2013
Carrying Amount = $1 100 000
Recoverable Amount = $700 000
Revaluation Loss = $1 100 000 700 000
= $400 000
30 June 2014
Carrying Amount = $700 000
Recoverable Amount = $300 000
Revaluation Loss = $700 000 300 000
= $400 000

300 000

DATE
1 July 2011
30 June 2012
30 June 2013

30 June 2014

1.b)

PARTICULARS
Machinery
Cash

DEBIT($)
1 000 000

CREDIT($)
1 000 000

Machinery
Revaluation Surplus

100 000

Loss on Revaluation Machinery

Revaluation Surplus - Machinery
Machinery

300 000
100 000

Loss on Revaluation - Machinery

Machinery

400 000

100 000

400 000
400 000

Comment on the effects on the comprehensive income statement in relation to

the revaluation method adopted for machinery from 30 June 2012 to 30 June 2014.
Comprehensive Income is the change in a companys net assets or equity from non-owner sources.
It includes income from any transactions outside of an owners investment or distribution to
owners. For instance, any gains or losses from selling securities, any changes in revaluation
surplus, etc. According to IFRS since 1 January 2009, an entity needs to make a Statement of
Comprehensive Income or two statements that consist of:
i. An Income Statement Shows Net Profit or Net Loss
ii. Statement of Comprehensive Income Shows Profit and Loss at the Top and then shows
items of other comprehensive income discussed above.
The statement of comprehensive income consists of Income Statement (Profit and Loss
Statement) and other comprehensive income that includes any Revaluation Surplus.
According to Recent Changes in Reporting Standards, instead of crediting the Asset to
Revaluation surplus, it will be credited to Other Comprehensive Income. Other
Comprehensive Income will then be debited to Revaluation Surplus. The transfer from
Other Comprehensive Income to Revaluation Surplus is done immediately and in the
same accounting period. If, however, there is a Revaluation decrease, the surplus
reversal is recognized through Profit or Loss and not in Comprehensive Income. Any
decrease because of revaluation is treated as an expense to the extent to which it is
more than the amount in previous revaluation increment. The Journal entries that will
be required are:

Debit: Asset
Credit: Other Comprehensive Income

Debit: Other Comprehensive Income

Credit: Revaluation Surplus
If this method is adopted, then the Journal Entries that will be required are:
30 June 2012
PARTICULARS
Machinery

DEBIT($)
100 000

Other comprehensive Income

Other Comprehensive Income

CREDIT($)
100 000

100 000

Revaluation Surplus

100 000

Any Revaluation surplus increases the Other Comprehensive Income component of the
Comprehensive Income Statement. Any Loss on Revaluation (the amount by which loss exceeds
the previous revaluation surplus) is shown as an expense in the Profit and Loss component. It is
shown as an expense because of the Principle of Conservatism.

c. What could be the possible reasons for impairment of land if there is any; you need to
refer to AASB 136 impairment of assets when explaining your answer.
According to Para 59 AASB 136, impairment happens the recoverable amount of an asset is lower
than its carrying amount. Recoverable amount of an asset is determined by comparing its Fair Value
less costs of disposal and its value in use. The higher between those two becomes an asset's
recoverable amount. According to para 9 of AASB, every reporting entity is required to look for any
signals to determine if there has been any reduction in an asset's Realisable amount. If there is any
indication that the realisable amount has decreased, the reporting entity is then required to estimate
the realizable amount.
Para 12 of AASB 136 requires every reporting entity to consider two sources of Information while
determining if there has been any impairment. The two sources are:
a. External Sources: These sources mainly involve an asset's market value with the passage of time
or changes in the market that may have a detrimental effect on an entity. In the case of land, market
value may reduce because of many reasons. For instance, it may appear that the land was illegally
acquired by the company, causing a defect in the title of land. Another example could be when the
Government declares the land Public Land.

Value of land may also decrease if there have been some technological, market, economic or legal
changes that negatively effect an entity. For example, an entity engaged in producing Genetically
Modified Crops may be using a technology that has been proven to be toxic or harmful for human
consumption. In this situation, any land used for farming purposes by the entity will no longer be
desirable in the market and hence it may lead to impairment.
b. Internal Sources: These mainly include information from within an organization about
obsolence or any damage to an asset. In the case of land, damage may be in terms of suitability for
use of land. For instance, an entity involved in producing and selling farm products commercially
may have used fertilizers, insecticides, pesticides, etc to the extent that the land has become
unsuitable for farming. As a result, its vale in use for the company has reduced, leading to
recognition of an impairment loss.

References:

1. Office ToDo 2010, 'revaluation surplus Property, Plant and Equipment schedules

2.

3.

4.
5.

template', retrieved 3 April 2014, <http://www.officetodo.com/public/property-plant-andequipment-schedules-template-%E2%80%93-revaluation-surplus/>.

PAK Accountants.com 2010, 'What is the difference between Income Statement and
Statement
of
Comprehensive
Income',
retrieved
4
April
2014,
<http://pakaccountants.com/difference-income-statement-and-statement-of-comprehensiveincome/>.
Ready Ratios, 'Statement of Comprehensive Income', retrieved 5 April 2014,
<http://www.readyratios.com/reference/accounting/statement_of_comprehensive_income.ht
ml>.
Debit
Credit
Pass
it,
'What
is
OCI?',
retrieved
5
April
2014,
<http://debitcreditpassit.com/2013/04/30/what-is-oci/>.
Australian Accounting Standards Board [AASB] 2009, AASB 136 Impairment of Assets
statements, Financial Reporting Handbook 2011, volume 1, Institute of Chartered
Accountants, Wiley, NSW.