Australian Financial Accounting Sample Assignment

On 30 June 2014 Petersen Ltd has the following land and building in its financial statements:

At 30 June 2014, the balance of the revaluation surplus is $400,000, of which $300,000 relates to the factory land and $100,000 to the buildings. On this same date independent valuations of the land and building are obtained.

Fair values at 30 June 2014:

Residential land, previously recorded at cost $1,100,000

Factory land, previously revalued in 2011, $700,000

Buildings, previously revalued in 2010 $900,000

Required:

• Record the journal entries for the revaluation on 30 June 2014.
• Discuss how a revaluation of a non-current asset could minimise or loosen the effects of a restrictive debt covenant.

Answer

(a) The residential land, which has not previously been revalued, has increased in value by $100 000. Hence the accounting entry pertaining to the residential land is:

In relation to the buildings, the revaluation entries would be:

AASB 116 requires that where a decrement in value reverses a previous increment credited to and still included in the balance of the revaluation surplus in respect of that same asset, the decrement may be debited directly to the revaluation surplus (rather than be treated as an expense of the period—nevertheless the reduction would be recorded within ‘other comprehensive income’). Hence, the $200 000 decrement in the value of the factory land can be debited against the existing balance of the revaluation surplus ($300 000) created in respect of that same asset, and the entry would be:

(b) It is common for a restriction to be imposed by lenders upon borrowers that restricts the level of debt that a borrowing company may attract. This limitation may be based on some proportion of total assets. Increasing the book value of assets through a revaluation will decrease the debt to asset ratio, thereby potentially loosening the effects of a debt restriction.