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Seminar Questions (Suggested)

Topic 3
Q1 2010 Session 2 Mid-semester Exam (Adapted)
In the first year of business Yourcompany Pty Ltd purchased land for $1 million. In the
second year you believe that it had risen in value and based on a reputable property valuers
report decided to value it at $2 million. In the third year, you sold the land for $2.2 million.
Assume no tax.
Required:
(a) Yourcompany Pty Ltd adopts the revaluation method for land. With respect to the land,
write the journal entries for the following transaction or event.
Revaluation of land in the second year of business [1 mark]:

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Sale of land in the third year of business [2 marks]:

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(b) Explain in what way is the treatment above asymmetric. [2 marks]

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Q2. Give the required adjusting entry at December 31, 2015, the end of the annual accounting
period for the three items below. If no entry is required, explain why.
A. Webster Ltd acquired a patent that cost $6,000 on January 1, 2015. The patent was
registered on January 1, 2010. The legal life of a patent is 20 years from
registration. Webster expects to use the patent the remaining legal life.

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B. Webster Company acquired a gravel pit on January 1, 2015, that cost $24,000.
The company estimates that 30,000 tons of gravel can be extracted economically.
During 2015 4,000 tons were extracted and sold.

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C. On January 1, 2015, Webster Company acquired a dump truck that cost $6,000 to
use hauling gravel. The company estimated a residual value of 10% of cost and a
useful life 4 years. The company uses straight-line depreciation.

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Q3. A company purchased equipment for $800,000 and has depreciated it using the straightline method for the past 5 years when its original life was estimated to be 10 years
with a $200,000 residual value. The equipment's utility to the company has declined
because they expect it to generate a net cash flow over the remaining 5 years of
$300,000 from its operation. Due to the specialised nature of the equipment, the
company expect they can only receive 200,000 if sold. If the asset has been impaired,
record the journal entry to recognize the loss.

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After the impairment, what will be the yearly depreciation expense if the original assessment
of the equipments useful life and residual value remains unchanged?

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Q4. A company uses the revaluation method for its buildings. The company revalue its
buildings with sufficient regularity. This works out to one revaluation every 3 years. The last
revaluation was done in 2012 and its next revaluation is to take place in 2015. In 2013,
however, the property market for where the company had its buildings crashed and property
values have declined.
(a) Given that the company uses the revaluation method and not the cost method, is there an
indication of impairment of the building asset? If there is impairment of buildings in 2013,
how would this be treated under the revaluation method?

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Q5. Consider the three accounting treatments below:


1. Under the revaluation model, revaluation decrements recognised in the income
statement but revaluation increments are not. That is, we count decrements as
expenses but increments are not counted as income.
2. When testing for impairment, the fundamental concern is whether the asset is
overvalued. That is, we make sure that the asset is not overstated but we do not really
care whether it is understated.
3. The lower of cost and net realisable value rule for inventory means that inventory can
never be recorded at a value higher than cost, but it can be recorded at a lower value.
That is, we make sure that inventory is not overstated but we do not really care
whether it is understated.
What accounting principle(s) are being applied?

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4

Q6. Final exam 2013, semester 1: Question 1 (Adapted)


You are working as the accountant for the company Jailbreak Pty Ltd. Jailbreak Pty Ltd
produces bolt cutters, a tool used for cutting chains, padlocks, bolts and wire mesh.

1 June 2004, Jailbreak Pty Ltd bought a factory building for $575,000 cash. In order to
get the building ready to be used, Jailbreak Pty Ltd spent an additional $50,000 cash to
have new floors installed on 1 July 2004. The factory building has an expected useful life
of 20 years and an expected residual value of $25,000 and is depreciated on a straight-line
basis.

Jailbreak Pty Ltds chief accountant and your superior, Angus Young, decided to account for
the factory building using the revaluation method starting as of the financial year ending 30
June 2006. Angus Young decided that the factory buildings value would be revalued every
second year by a reputable independent property valuer. That is, the first revaluation is
planned to be done on 30 June 2006, the second revaluation to be done 30 June 2008 and so
on.
As at 30 June 2006, the value of the factory is estimated at $745,000. Although the next
revaluation is scheduled to take place 30 June 2008, there was indication that the factory
building might be impaired as at 30 June 2007. In preparing for the impairment testing, you
have estimated, as at 30 June 2007, the factorys fair value less cost sell to be $620,000 and
its value in use to be $605,000. As at 1 January 2008, Jailbreak Pty Ltd. shut down its
operations and sold its factory for $545,000 and received cash in full.
From 1 June 2004 until 1 January 2008, there is no change in the original assessment of the
residual value, useful life or the depreciation method. However, Angus Young carefully
reminds you that depreciable amount might change after a revaluation.

Required:
(a) With respect to revaluation of the Factory Building on the 30 June 2006, write the journal
entries for the following transactions or events (if none is applicable write NA).
(i) Calculate accumulate depreciation as of 30 June 2006 and record the write down of the
Factory Building to its carrying amount as of 30 June 2006:
Accumulated depreciation as 30 June 2006 (intermediate step, no marks):

Journal entries to record write down to carrying amount (1 mark):

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(ii)Calculate any valuation increment or decrement and, if applicable, record the revaluation of
the Factory Building as of 30 June 2006:
Valuation increment/decrement as 30 June 2006 (intermediate step, no marks):

Journal entries to record the valuation increment/decrement (1 mark):

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(b) With respect to the impairment testing of the factory building as at the 30 June 2007,
write the journal entries for the following transactions or events (if none is applicable write
NA).
(i)

Calculate accumulate depreciation as of 30 June 2007 and record the write down of the
Factory Building to its carrying amount as of 30 June 2007 (1 mark):

Accumulated depreciation as at 30 June 2007 (intermediate step, no marks):

Journal entries to record write down to carrying amount (1 mark):

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(ii)

With regard to the impairment testing on 30 June 2007, what is the recoverable amount
and, if any, what is the impairment loss and record the journal entries, if any, for the
impairment loss (2 marks):

Recoverable amount (1 mark):

Impairment loss, if any (intermediate step, no marks):

Journal entries to record impairment loss, if any (1 mark):

(c) As at 1 January 2008, record the journal entries for the sale of factory building (3 marks):
Journal entries to record the sale of the factory building:

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