Exam 6: Revaluation and Impairment Testing of Non-Current Assets

Mendelssons Ltd has a machine that has been revaluing over a number of years. The valuation as at 1 January 2002 is $130,000. The previous valuation was $145,000 and the accumulated depreciation is $40,000. The revised salvage value is $15,000 and the estimated useful life remaining is 12 years. The benefits from the machine are expected to be derived evenly over its life. In the previous year, the machine had been devalued by $15,000 and this amount written off to the income statement. What are the entries at 1 January 2002 to record the revaluation and at 31 December 2002 to record depreciation?

Entities that elect to report plant and equipment at cost less accumulated depreciation are required to disclose a valuation of plant and equipment every 3 years in a note to the accounts:

Burchells Ltd owns a machine that originally cost $36,000. It has been depreciated using the straight-line method for 3 years, giving an accumulated depreciation of $15,000 (the salvage value was estimated at $6,000 and the useful life at 6 years). At the beginning of the current financial year its carrying value is therefore $21,000. It has been decided by the directors to revalue it to fair value, which is assessed to be $38,000. The salvage value and useful life are considered to be unchanged. What are the appropriate entries to record the revaluation and the depreciation expense for the current year (rounded to the nearest dollar)?

If an asset is subject to depreciation or amortization there is no longer a need to test the asset for impairment.

AASB 116 provides guidance on fair values which states:

Casey Co Ltd is assessing the recoverable amount of some land it invested in 5 years ago at a cost $600,000. Management has sought independent valuation advice that indicates that the land may be sold in 6 years' time for $800,000. Since the land is not generating any cash flows, this is its undiscounted recoverable amount. The appropriate discount rate is estimated to be 7 per cent. The present value of $1 received in 6 years' time at a discount rate of 7 per cent is 0.6663. What is the effect of using the discount rate on the need to write-down the value of the asset?

A class of non-current assets as defined by AASB 116 is a category of non-current assets that:

Cars and Trucks Limited owns an engine testing machine which was purchased for $120,000. After 3 years of use the machine had accumulated depreciation of $58,560 but was revalued to $80,000. Two years later the machine was sold for $60,000 and had accumulated depreciation at the time of sale of $36,800. What journal entries would be required to record the sale of the machine in accordance with AASB 116 requirements?

An entity that elects the revaluation model to measure a class of asset, is permitted to revert back to the cost model provided that this will provide more relevant and reliable information.

On disposal of an asset a gain or loss is the difference between the proceeds from sale anD.

Mozart Ltd acquired a building for $1.5 million. Management estimates the value of land to be 40% of cost. The building is estimated to have a useful life of 50 years. After 25 years, the property's fair value is estimated at 1.2 million. It is expected that the life of building will remain the same and salvage value is expected to be $100,000. Which of the following statements is correct at end of year 25 with respect to the revaluation?

Seagull Marinas Ltd owns land that was purchased for $300,000 to be used as the future site of a boat shed. Due to the development of a resort in the vicinity, the land's fair market value had risen to $480,000 on 30 June 2002. A revaluation undertaken on 30 June 2005 of $150,000 reflects the effect of the failure of resort development and local concerns about the protection of the nesting sites of endangered sea birds located near the land. What are the journal entries required to record the revaluations on 30 June 2002 and 30 June 2005?

AASB 116 permits the following with respect to measurement of non-current assets using revaluation model.

According to Positive Accounting Theory, the size of the entity may have an impact on management's decision to revalue because of management's motivation to reduce political costs. There is more than one possible view regarding the effect of revaluation on political visibility, including:

Where an asset's carrying amount based on its cost is written down to its recoverable amount, AASB 136 specifies that:

Chopin Ltd has a debt contract and is close to violating the return on equity ratio as stipulated in the debt agreement. What is the most appropriate action to take?

AASB 136 does not require the use of present values when determining the recoverable amount of an asset:

Manchester Ltd has a building that originally cost $850,000 and has accumulated depreciation of $120,000 as at 30 June 2002. It is decided on 1 July 2002 that the building should be revalued to $820,000. What are the appropriate entries to record the revaluation using the net method?

Australia is the only country that allows upward revaluations of non-current assets:

Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset: