In the 30 June 2009 annual report of Bruce Ltd. the equipment was reported as fo
ID: 2353539 • Letter: I
Question
In the 30 June 2009 annual report of Bruce Ltd. the equipment was reported as follows:
Equipment (at cost) $500,000
Accumulated depreciation $150,000
= $350,000
The equipment consisted of two machine, Machine A and Machine B. Machine A had cost $300,000 and had a carrying amount of $180,000 at 30 June 2009, and Machine B had cost $200,000 and was carried at $170,000. Both machines are measure using the cost model, and depreciated on a straight-line basis over a 10-year period.
On 31 December 2009, the directors of Bruce Ltd decided to change the basis of measuring the equipment from the cost model to the revaluation model. Machine A was revalued to $180,000 with an expected useful life of 6 years, and Machine B was revalued $155,000 with an expected useful life of 5 years.
At 30 June 2010, Machine A was assessed to have a fair value of $163,000 with an expected useful life of 5 years, and Machine B's fair value was $136,500 with an expected useful life of 4 years. The tax rate is 30%
Required:
1. Prepare the journal entries during the period 1 July 2009 to 30 June 2010 in relation to the equipment.
2. According to accounting standards, on what basis may management change the method of asset measurement, for example from cost to fair value?
Explanation / Answer
Depreciation entry at 12/31/09 Machine A Depreciation expense 15,000 Accumulated depreciation 15,000 (300,000/10 *1/2 year) Machine B Depreciation expense 10,000 Accumulated depreciation 10,000 (200,000/10 *1/2 year) Revaluation: Machine A Fixed Assets 15,000 Revaluation Surplus 15,000 (Net book value was 165,000, revalued to 180,000) Machine B Impairment losses 5,000 Fixed Assets 5,000 (net book value was 160,000 revalued to 155,000) June 30,2010 Depreciation entry Machine A Depreciation expense 15,000 Accumulated depreciation 15,000 (New book value 180,000 6year depreciation, 1/2 years depreciation) Machine B Depreciation expense 15,500 Accumulated depreciation 15,500 (new book value 155,000 5 year depreciation 1/2 year depreciation). Revaluation entry Machine A Revaluation Surplus 2,000 Fixed Assets 2,000 (Machine net book value 165,000, fair value 163,000) Machine B Impairment losses 3,000 Fixed assets 3,000 (Machine written down from 139,500 to fair value of 136,500) Management may change from cost to fair value when there is a material change in the value of fixed assets. An appraisal is required.