Question

TAKULAH Traders Ltd purchased a machine for $650,000, and there was an accumulated depreciation balance of $110,000 at 30 June 2022. Its fair value is assessed at this time, with its first revaluation as $450,000. The machine’s useful life is expected to be 5 more years, and the residual value is $50,000. On 1 July 2023, the asset’s fair value is $460,000, and the residual value and useful life are expected to be unchanged (that is, there is 4 years of remaining life). What are the journal entries necessary to account for all the above transactions and events up to 1 July 2023, in accordance with AASB 116 if the revaluation is undertaken? a) Debit Machine $450,000, Credit Accumulated Depreciation $110,000, Credit Revaluation Surplus $340,000 b) Debit Machine $450,000, Credit Accumulated Depreciation $110,000, Credit Revaluation Reserve $340,000 c) Debit Machine $460,000, Credit Accumulated Depreciation $110,000, Credit Revaluation Surplus $350,000 d) Debit Machine $460,000, Credit Accumulated Depreciation $110,000, Credit Revaluation Reserve $350,000

Answer 1

The correct journal entry for the revaluation of a machine as per AASB 116 is option b), which involves debiting the Machine account, crediting Accumulated Depreciation, and crediting Revaluation Surplus. Depreciation must also be accounted for in the upcoming year using the new fair value, useful life, and residual value.

Step-by-step explanation:

The student has requested help with journal entries related to revaluation of a machine as per AASB 116. On 30 June 2022, TAKULAH Traders Ltd assessed its machine's fair value to be $450,000 when the carrying amount was $540,000 (i.e., original cost of $650,000 less accumulated depreciation of $110,000). The proper journal entry to record the revaluation on this date would be:

• Debit Machine (with the new fair value): $450,000
• Credit Accumulated Depreciation (to remove the old accumulated depreciation): $110,000
• Credit Revaluation Surplus (for the increase in asset value): $340,000

Now, as per the given options, the correct entry that mirrors this explanation would be option b).

Next, on 1 July 2023, the asset's fair value is recorded at $460,000. Assuming no depreciation took place in the one day on 30 June 2023, the entry to record the increase in fair value from $450,000 to $460,000 would be:

• Debit Machine: $10,000
• Credit Revaluation Surplus (to reflect the further increase in fair value): $10,000

Furthermore, depreciation expense for the year ended 30 June 2023 needs to be calculated and recorded, taking into account the new revalued amount, useful life, and residual value. The annual depreciation would then be calculated as ($450,000 fair value - $50,000 residual value) / 5 years = $80,000 per year.