Question

Illustration 3 A company has rented a property where it collects a yearly rent of Nu. 120,000 from the tenants. The property was constructed at a cost of Nu. 2 million before 5 years The company charged 10% depreciation on written down value method. In the current year, management intends to change the method of measurement from cost to fair value due to the volatility of property market in the country. The fair value of the similar property in the market was reported as Nu. 1,345,800. Compute the gain or loss on remeasurement of the investment property and pass journal entries to record the effect. ​

Answer 1

The gain or loss on remeasurement of the investment property can be calculated by subtracting the carrying value of the property from its fair value. The carrying value of the property can be calculated using the written down value method.

the written down value method, also known as the reducing balance method, is a depreciation method where the depreciation expense is calculated as a fixed percentage of the net book value of the asset at the beginning of each year.

In this case, the company charged 10% depreciation on the written down value method. The initial cost of the property was Nu. 2 million. Here’s how to calculate the carrying value of the property after 5 years:

Year 1:

• Depreciation expense = 10% * 2,000,000 = 200,000

• Carrying value at end of year = 2,000,000 - 200,000 = 1,800,000

Year 2:

• Depreciation expense = 10% * 1,800,000 = 180,000

• Carrying value at end of year = 1,800,000 - 180,000 = 1,620,000

Year 3:

• Depreciation expense = 10% * 1,620,000 = 162,000

• Carrying value at end of year = 1,620,000 - 162,000 = 1,458,000

Year 4:

• Depreciation expense = 10% * 1,458