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Provide the journal entries to account for the revaluation on June 30 2022

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Question 1: ABC Ltd has the following Land and buildings in its financial statements as at June 30 2022:

Residential Land, at cost

2 000 000

Factory land, at valuation 2020

1 800 000

Buildings, at valuation 2020

1 600 000

Accumulated depreciation

(200 000)

At June 30 2022, the balance of the revaluation surplus is $800 000, of which $600 000 relates to the factory land and $200 000 to the buildings. On this same date, independent valuations of the Land and buildings are obtained. In relation to the above assets, the assessed fair values at June 30 2022 are:

Residential Land, previously recorded at cost

2 200 000

Factory land, previously revalued in 2020

1 400 000

Buildings, previously revalued in 2020

1 800 000

Required:
Provide the journal entries to account for the revaluation on June 30 2022. ABC Ltd classifies the residential Land and the factory land as different classes of assets.

ANSWER:
The Residential Land of ABC Ltd,which had been valued at cost for 2000000,is now revalued for the first time at 2200000. Therefore, there is a profit of 200000. The accounting entry for recording the revaluation will be:

       Dr     Residential Land A/c                200000

     Cr     Profit on revaluation A/c                    200000

              (Residential Land revalued at 2200000)

The company also owns Factory Land at a valuation of 1800000. It has been revaluedat 1400000 on June 30 2022. As per AASB 116, if there is a diminution in the value of an asset because of which any earlier profit on revaluation gets reversed but still remains included in the revaluation surplus, then the loss may be debited to other comprehensive income (D., 2018, p (8-11)). Thereafter, the same can be adjusted to the revaluation surplus of the same asset. So, the decrease in the valuation can be directly debited to the revaluation surplus of the asset which has been revalued (D., 2018, p (8-11)). The journal entry, in this case, will be:

Dr     Loss on Revaluation A/c            400000

       Cr     Factory Land A/c                          400000

              (Loss on revaluation of factory land, revalued at 1400000)

In the case of Buildings, there is an accumulated depreciation of 200000. It has been revalued from 1600000 to 1800000. Here, two journal entries will be passed. First, to transfer the accumulated depreciation to the Asset A/c. and next to record the revaluation.

       Dr     Accumulated Depreciation A/c      200000

       Cr     Buildings A/c                         200000

              (Accumulated depreciation transferred to the Building A/c)

       Dr     Buildings A/c                    400000

       Cr     Profit on Revaluation A/c                   400000

              (Buiding revalued at 1800000 and Profit recorded 400000)

At the end of the current accounting period, the amount recorded in the Other Comprehensive Income(OCI) will be transferred to the Revaluation Surplus A/c. The journal entry will be:

Dr    Profit on Revaluation A/c           200000

             (residentialLand)

       Dr    Profit on Revaluation A/c           400000

             (building)

       Cr    Revaluation Surplus A/c                     600000

             (Profit on revaluation of assets transferred to surplus A/c)

Question 2: XYZ Ltd acquires 100 per cent of Red-X Ltd on July 1 2021. XYZ Ltd pays the shareholders of Red-X Ltd the following consideration:

Cash

70 000

Plant and equipment

fair value $250 000; carrying amount in the books of ABC Ltd $170 000

Land

fair value $300 000; carrying amount in the books of ABC Ltd $200 000

There are also legal fees of $190 000 involved in acquiring Red-X Ltd.
On July 1 2021 Red-X Ltd's statement of financial position shows total assets of $300 000 and liabilities of $3000 000. The fair value of the assets is $800 000.

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 Red-X using appropriate accounting standard.

ANSWER:
Calculation of Purchase Consideration:

Cash                                      70000

      Fair Value of Plant and Machinery              $250000

      Fair Value of Land                           $300000$620000

XYZ Ltd. is paying consideration to the shareholders of Red-X Ltd. in the form of Cash, Plant and Machinery having a fair value of $250000 and Land with a fair value of $300000.

Calculation of the Net Assets acquired:

Assets $800000

      Less: Liabilities                             $3000000$(2200000)

Goodwill                                                  $2820000

On July 1 2021, the total assets of Red-X Ltd. were $300000, while the total liabilities stood at $3000000. The assets have been valued by an independent valuer at $800000. So, the goodwill in this acquisition transaction is $2820000 being the difference between the Net assets and the Purchase consideration (Oyewobi, I.A., 2019, p 63(2,5)).

As per AASB 3, legal fees should not be included while calculating goodwill/capital reserve. Although acquisition costs should normally be included but AASB 3 states that acquisition costsare costs incurredforexecuting a business purchase transactionsin the nature of legal fees, consulting fees, administrative costs or registering expenses. Hence, the purchaser should record them as expenses in his books in the period in which such expenses are incurred, and the benefit is received.

Therefore, legal fees of $190000 incurred by XYZ Ltd. for acquiring Red-X Ltd. will not be included in the cost of acquisition of the entity.

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