Q Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Home, - Has any goodwill been acquired Question 1: An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240 000 at the beginning of the year. Depreciation for the year is based on the revalued amount and the remaining useful life of eight years. Shareholders' equity, before adjusting for the above revaluation and subsequent depreciation, is as follows: Share capital 600 000 Revaluation surplus 90 000 Capital profits reserve 170 000 Retained earnings 140 000 Total 1 000 000 Required:Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Which of the equity accounts would be affected directly or indirectly by the revaluation? ANSWER: Particulars Dr (in $) Cr (in $) Dr Accumulated depreciation 40000 Cr Asset 40000 (to eliminate accumulated depreciation) Dr Asset 80000 Cr Gain on revaluation (part of OCI) 80000 (to recognise the revaluation) Dr Gain on revaluation (part of OCI) 80000 Cr Revaluation surplus 80000 (to transfer the gain to revaluation surplus) Dr Depreciation expense 30000 Cr Accumulated depreciation 30000 (to recognise depreciation expense) Dr Revaluation surplus [(240000-160000)/8] 10000 Cr Retained earnings 10000 (to transfer the excess depreciation to revaluation surplus) Due to the revaluation of the asset, two accounts under equity section will be affected namely revaluation surplus and retained earnings. When assets is revalued, revaluation surplus account should be adjusted. At the time of making entry of depreciation, the excess depreciation due to revaluation shall be charged from revaluation surplus and thus retained earnings would be increased by such amount. Question 2 ABC Ltd acquires 100 per cent of RedCarpet Ltd on 1 July 2021. ABC Ltd pays the shareholders of RedCarpet Ltd the following consideration: Cash 35 000 Plant and equipment fair value $125 000; carrying amount in the books of ABC Ltd $85 000 Land fair value $150 000; carrying amount in the books of ABC Ltd $100 000 There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd.On 1 July 2021 RedCarpetLtd's statement of financial position shows total assets of $300 000 and liabilities of $150 000. The fair value of the assets is $400 000. Required: Has any goodwill been acquired and, if so, how much? And discuss the potential for including associated legal fees into the cost of acquiring RedCarpet using appropriate accounting standard. ANSWER: Calculation of Purchase Considerations: Particulars $ Cash 35,000.00 Plant & Equipment 125,000.00 Land 150,000.00 Purchase considerations 310,000.00 Calculation of fair value of Net Identifiable assets: Particulars $ Fair value of assets 400,000.00 Less: Fair value of liabilities 150,000.00 Fair value of Net Identifiable Assets 250,000.00 Calculation of Goodwill: Particulars $ Purchase considerations 310,000.00 less: fair value of Net Identifiable assets 250,000.00 Goodwill 60,000.00 As per IFRS 3 "Business Combination", cost of acquisition should not include the legal fees and should be expensed in the year in which it is incurred. Also, IFRS 10 "Consolidation" states the same provisions and stand in favour of treating such associated legal fees as an expense and should be charged in the Income Statement in the year in which in it is incurred. Related: Has any goodwill been acquired Determine the interest rate implicit in the lease Provide explanation for capitalising the expenses How does hedging arrangement reduce foreign currency risk exposure
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