Financial Accounting: GAAP Principles 3e

Tutorial 4.1
(Solution in SQB)

Chapter 4

Recognising property, plant

an equipment

Basic level

Part A
Required:
Indicate whether the accounting treatments are CORRECT or INCORRECT. If you believe the
treatment to be incorrect, briefly state reason(s) why.
1. A company recently acquired a machine and management have capitalised the following to
the cost account:
Purchase price
Delivery costs
Installation and assembly costs

R2 000 000
R45 000
R30 000

2. Equipment was purchased for R400 000 and is revalued every two years, using the
revaluation model. The equipment has no residual value, and has a useful life of 10 years.
The carrying amount prior to the first revaluation was R320 000. The fair value of a new
piece of equipment was R600 000. The following entries were therefore recorded:
Dr

Accumulated Depreciation
Equipment cost

R80 000

Cr

R280 000

Cr

Equipment cost
Revaluation gain (P&L)

Dr

R80 000
R280 000

3. A company has four investment properties. It has chosen the fair value model for three of the
properties as they are in good areas and will increase in value over time. The revaluation
model has been used for the sole remaining property.
4. A building correctly had the following balances at year-end prior to an impairment test:
Revalued amount
Accumulated depreciation
Revaluation surplus

R800 000
R120 000
R60 000

The impairment test revealed a recoverable amount of R300 000. The following entry was
therefore recorded:
Dr
Dr
Cr

Revaluation surplus
Impairment loss (P&L)
Accumulated Impairment

60 000
320 000
380 000

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Financial Accounting: GAAP Principles 3e

Chapter 4

Part B
Ricky Ltd purchased a large computer server on 30 June 20x5 for R400 000. At the time, the
residual value was estimated to be R60 000, with a useful life of four years. These estimates
were confirmed at the 31 December year-end for both 20x5 and 20x6.
At the end of 20x7, however, the residual value was estimated to be R20 000, and the remaining
useful life was believed to be three years.
Required:
Calculate the depreciation charge for the 20x7 financial year.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.2
(Solution in SQB)

Chapter 4

PPE cost model

and revaluation model

Basic level

1.

Why do companies typically prefer to use the historic cost model rather than the revaluation
model?

2.

A company seeks to revalue a machine at the beginning of the year. A new machine is
valued at R100m. The machine (which has been used for two years) has a carrying amount
of R60m. Machines of this nature are expected to have a useful life of 10 years, with a
residual value of R10m. What is the amount of the revaluation surplus that needs to be
recorded?

3.

Using the scenario in 2 above, discuss the journal entry(ies) that should be passed when
recording the revaluation. Amounts are not required.

4.

A building correctly had the following balances at year-end prior to an impairment test:
Gross replacement cost
Accumulated depreciation
Revaluation surplus

R800 000
R120 000
R60 000

The impairment test revealed a recoverable amount of R300 000. Show the journal entry that
should be recorded.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.3

PPE revaluation model

and deferred tax

Chapter 4

Intermediate level

HomeChoice Ltd revalued its plant for the first time on 1 January 20x9 to net replacement cost.
The gross replacement cost on that date (1 January 20x9) was R800 000. The plant was
purchased for R600 000 on 1 January 20x5. At that date the useful life was estimated at 10 years
with no residual value (both estimates have not changed). Capital allowances (for income tax
purposes) are at 10% per annum, on a straight-line basis.
The companys policy on plant states that:

Depreciation is provided on the straight-line basis

Accumulated depreciation (at revaluation date) is eliminated or offset against the gross
carrying amount, and
The revaluation surplus is released to retained earnings as the asset is depreciated.

The companys financial year-end is 31 December. The income tax rate is 28% and the capital
gains tax is 14%.
Required:
(a) Prepare the journal entries recording the revaluation of plant on 1 January 20x9, including
the deferred tax effect. (Note: Journal entries for depreciation, deferred tax, or transfer to or
from the revaluation surplus at 31 December 20x9 are NOT required.)
(b) Calculate the deferred tax balance as at 31 December 20x9.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.4

PPE and investment

property

Chapter 4

Intermediate level

Thorne (Pty) Ltd had the following balances in their trial balance at 31 March 20x8 (the previous
reporting date):
Land and buildings
Vehicles
Machinery
Accumulated depreciation on buildings
Accumulated depreciation on vehicles
Accumulated depreciation on machinery
Total

R
2 000 000
500 000
640 000
(48 500)
(50 000)
(280 000)
2 520 000

Additional information:
(a) The land and buildings consist of two properties. The first property, located in Milnerton was
purchased for R1 000 000 on 1 January 20x4. At this date the value of the land was
considered to be R250 000. The fair value of the property on 1 July 20x8 was R1 400 000.
On this day, Thorne moved all of their production facilities to the second building owned by
the company, located in Montague Gardens, and the Milnerton property was let to tenants
from this date, at R25 000 per month. At 31 March 20x9, the market value of the Milnerton
property was R1 460 000.
(b) The property located in Montague Gardens was purchased on 1 April 20x6. The value of the
land was considered to be R400 000. At 31 March 20x9, the market value of this property
was R1 600 000.
(c) The fleet of vehicles was acquired on 1 October 20x7, to be used for a fixed period of four
years, with an estimated residual value of R100 000.
The following accounting policies are applied by Thorne:

Buildings are depreciated over 75 years, using the straight-line method.

Vehicles are depreciated using the straight-line method over the estimated useful life of the
vehicle.
Machinery is depreciated using the diminishing balance method at 25%.
The fair value model is used for investment property.
The cost model is used for property, plant and equipment.

Required:
Calculate income and expenses relating to the information above that would be included in the
statement of comprehensive income of Thorne (Pty) Ltd for the year ended 31 March 20x9.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.5

Chapter 4

PPE properties and

revaluation model

Intermediate

Moolenberg Ltd (Moolenberg) held various non-current assets during the year, and has
consistently applied the following accounting policies relating to non-current assets:
Investment property is recognised according to the fair value model;
All other properties are revalued at the start of every third year according to the revaluation
model. Revalued properties are reported on the net basis, that is, accumulated depreciation
is eliminated at each revaluation date. The revaluation surplus is released only on disposal of
the asset.
Equipment is recognised according to the cost model.
Required:
You are required to assist the management of Moolenberg with the correct application of their
accounting policies, using the additional information below.
Additional information:
Woodstock property
This property was purchased on 1 January 20x3 for R1 000 000. It consists of land and a building
that is rented out to other businesses. Moolenberg bought this property in case they needed the
extra office space. So far they have not needed to occupy it, and therefore it is held in order to
earn rental income and for capital appreciation.
The following information relates to the Woodstock property:
Date
31/12/x4
31/12/x5
31/12/x6

Market value
R1 300 000
R1 500 000
R1 800 000

Total useful life

40 years
40 years
40 years

On 30 June 20x6 an amount of R140 000 was paid for repairing the air conditioning of the
building.
Oranjezicht property
This property was purchased on 1 January 20x2 for R52 000 000, of which 45% related to land
and the rest to the building. The building is used by Moolenberg as its head office, and when
purchased, it was expected to have a useful life of 30 years, with a residual value of R4 200 000.
These estimates have been reviewed every year and have remained unchanged.
The following valuations were obtained for the Oranjezicht property:
Date
01/01/x4
01/01/x6

Net replacement
cost of the
building
R30 800 000
R30 200 000

Market value of
the land
R24 000 000
R24 800 000

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Financial Accounting: GAAP Principles 3e

Chapter 4

Project Nossie
Moolenberg is involved in a new project (called Nossie) for which an expensive piece of
equipment was imported from Europe. Risks and rewards passed on 1 October 20x4 when the
equipment arrived at the harbour and it was correctly costed at R6 800 000. After a delay due to
lengthy inspection procedures, the equipment was transported to the factory on 1 January 20x5
at a cost of R200 000. The total useful life of the equipment was initially estimated at 5 years with
a residual value of R2 000 000.
At 1 January 20x6 an important component of the equipment was identified as being badly
damaged and was replaced. The damaged component had a carrying amount of R340 000
(original cost R400 000) and was sold for only R100 000. A new component was purchased for
R600 000 and installed on the same day.
At 31 December 20x6, the total useful life of the equipment was now estimated at eight years and
the residual value at R1 850 000. Changes in estimates are applied evenly over the current and
future periods affected.
Required:
(a) Briefly explain how Moolenberg Ltd should recognise its Woodstock property in its financial
statements for the year ended 31 December 20x6. (Your answer should not address the
definition and recognition criteria of an asset, but should focus on the classification and
accounting of the asset).
(b) Prepare ALL of the journal entries relating to the following properties for the year ended
31 December 20x6 (dates, narrations and closing journal entries are not required):
Woodstock property
Oranjezicht property.
(c) Show how the equipment used for Project Nossie should be disclosed in the notes to the
financial statements of Moolenberg Ltd for the year ended 31 December 20x6, in
compliance with IAS16, Property, Plant and Equipment. Comparatives are not required.
Show all your workings.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.6

Chapter 4

PPE revaluation model

& changes in estimates

Intermediate

You have been provided with the following extract from the fixed asset register and accounting
policies of Southern Ltd as at 30 June 20x4:
Valuation/cost
Accumulated depreciation
Carrying amount at 30 June 20x4

Building
R3 900 000
(190 000)
R3 710 000

Historical cost
Accumulated depreciation
Net carrying amount based on historical cost

R4 000 000
(550 000)
R3 450 000

Equipment
R250 000
(88 000)
R162 000

The company has applied the following accounting policies consistently:

The company has selected the revaluation model for buildings, and the cost model for
equipment.
Revaluations are performed every three years, and the next revaluation date is 1 July 20x4.
The company transfers a portion of the revaluation surplus to retained earnings based on its
usage.
The effects of any change in estimates are applied evenly over the current and future years.

The market value (that is, fair value) of the building was determined at R4 500 000 at 1 July 20x4.
You obtained the following estimates from the directors of Southern Ltd at 30 June 20x5:
Revised residual value
Estimated remaining useful
life

Building
R2 250 000
(20x4: R2 000 000)
15 years
(20x4: 18 years)

Equipment
R30 000
(20x4: R30 000)
4 years
(20x4: 6 years)

Required:
1.

2.

3.

IAS16, Property, Plant and Equipment allows for two measurement models to determine the
carrying amount of property, plant and equipment at each subsequent reporting date, the
cost model and the revaluation model. List two reasons why a company may decide to
rather apply the revaluation model to recognise its property, plant and equipment at
subsequent reporting dates, as opposed to the cost model.
Prepare all the journal entries relating to the building and equipment to be processed during
the financial year ended 30 June 20x5, assuming that the company has elected to eliminate
accumulated depreciation with each revaluation. Closing journal entries are not required.
Narrations are required.
Prepare the note disclosure as required by IAS8, Accounting Policies, Changes in
Accounting Estimates, and Errors, to be included in the financial statements of Southern Ltd
for the year ended 30 June 20x5 (comparatives are not required).

Notes relating to accounting policies and Property, Plant and Equipment are NOT required.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.7

Chapter 4

PPE revaluation model &

disclosure

Intermediate

Ignore tax.
Jelly Ltd is a company which manufactures jelly from organic fruit syrups for the local market. Its
business involves technologically advanced machinery. Machinery was acquired on 1 July 20x2
at which date it had an estimated useful life of 10 years, with no residual value.
The accounting policy is to revalue the machinery every three years. Revalued assets are
disclosed at the revalued amount when the asset is revalued (that is, accumulated depreciation is
eliminated against the cost of the asset at the revaluation date), and the revaluation surplus is
released to retained earnings as the asset is depreciated.
The following information appeared in the fixed asset register on 30 June 20x5.

Cost
Accumulated depreciation

Machine A
R000
4 800
1 440
3 360

Machine B
R000
4 500
1 350
3 150

On 1 July 20x5 the independent valuator, a Mr Brown, valued Machines A and B at a gross
replacement value of R6 million and R5,4 million respectively. On the same date, the production
foreman indicated that Machine A was likely to have an estimated life of two years less than that
originally anticipated at its acquisition date.
In June 20X6 the directors decided that Machine B should be replaced by a more technologically
advanced machine. The value in use of this machine is considered immaterial, and it is estimated
that this machine could be sold for R1 million early in the following financial year.
Required:
Prepare the journal entries relating to Machines A and B for the financial year ended 30 June
20x6.
Provide all note disclosure relating to the above information in the financial statements of Jelly
Ltd for the year ended 30 June 20x6. Comparatives are not required.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.8

Chapter 4

PPE disclosure

Intermediate

The following is an extract from the notes to the financial statements of Trendy Limited at
30 September 20x3, its previous financial year-end:
Land
Valuation
Cost
Accumulated depreciation
Carrying amount at 30/09/20x3

Buildings

R
32 500

R
200 500

32 500

(15 600)
184 900

Furniture &
equipment
R
110 000
(45 520)
64 480

Motor
vehicles
R
121 000
(43 200)
77 800

Total
R
233 000
231 000
(104 320)
359 680

Additional information:
Land and buildings were purchased ten years ago on 1 October 1994 at a cost of R21 000 and
R198 500, respectively. On that date, the buildings were estimated to have a useful life of
50 years and a residual value of R25 000 (both estimates have been confirmed at each
subsequent reporting date).
The companys policy is to revalue land and buildings at their fair value based on an open market
valuation (in other words, the net replacement value) at the end of every five years. On
30 September 20x4, the fair values of land and buildings were determined by an independent
valuer at R40 000 and R195 000 respectively. Buildings are depreciated using the straight-line
method. Land is not depreciated.
Assets are revalued at the end of the financial year, after taking into account any depreciation
expense for the year. When assets are revalued, the accumulated depreciation is offset against
the carrying amount.
Motor vehicles, furniture and equipment are depreciated as follows (no residual values):

Motor vehicles: straight-line basis over expected useful life of 5 years

Furniture and equipment: diminishing (reducing) balance method, at 12,5% per annum.

The company sold a motor vehicle (cost R36 000, accumulated depreciation R14 400 at date of
sale) on 1 October 20x3 for a profit of R3 600. The vehicle was bought on 1 October 20x1. A
replacement motor vehicle was purchased at a cost of R45 000 on 1 October 20x3.
You can assume that there were no purchases or sales other than those listed in the question.
Required:
Show how Trendy Ltd should disclose property, plant and equipment in the notes to the
financial statements at 30 September 20x4.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.9

Chapter 4

PPE revaluation model

and deferred tax

Advanced level

You are provided with the following information relating to a specific asset acquired by a
company:
Asset acquired cost
Gross replacement cost

1 January 01
1 January 03
1 January 04

R200 000
R300 000
R360 000

Capital allowances
Depreciation

20% per annum, not apportioned

10% per annum, straight line

Normal tax rate =

Capital gains tax =
Year-end =

40%
20%
31 December

The asset was revalued for first time on 1 January 20x3 and annually thereafter.
Policy on revaluations:
Accumulated depreciation is netted off against the gross carrying amount of the asset on
revaluation, and the revaluation surplus is released to retained earnings as realised. The tax
component of items of other comprehensive income is disclosed separately on the statement of
comprehensive income.
The company has chosen to present the statement of comprehensive income in two separate
statements: an income statement and a statement of comprehensive income.
Required:
(a) Journal entries in 20x3 and 20x4. Closing entries are not required.
(b) Discuss the treatment in 20x4 if a decision was made in December 20x4 to sell the asset for
R220 000, and the sale is expected to be concluded at the end of March 20x5. Assume that
the classification as held for sale has not been met.
(c) Disclosure relating to deferred tax.
(d) Show how the revaluation of the asset and any related tax entries would be reflected in the
statement of comprehensive income and the notes thereto for the year ended 31 December
20x4.
(e) Prepare the revaluation surplus column in the statement of changes in equity for the year
ended 31 December 20x4, with comparatives.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 4.10

Chapter 4

PPE revaluation model

and disclosure

Advanced

The following extract was obtained from the trial balance of Factory 17 at 30 September 20x6:

Machinery cost
Accumulated depreciation machinery
Factory building carrying amount

Additional
information
1
1
2

R
600 000
?
?

Additional information:
1.

Machinery is measured by applying the cost model.

The company uses two machines in the factory:

Machine A is used to cut the wood into various sizes. This machine was acquired on
1 April 20x4 at a cost of R250 000. At the acquisition date it was estimated that this
machine would have an estimated useful life of five years and a residual value of
R50 000. Resulting from the continued use of this machine for the current contract, it is
estimated at 30 September 20x6 that this machine will be used for only a further
18 months, at which date it will be scrapped at a zero residual value.

Machine B was previously used as a back-up for Machine A, and as the company had
very low production levels before securing the current contract, this machine was
recognised at its recoverable amount of R100 000 at 30 September 20x5. This machine
was originally bought for R350 000 and accumulated depreciation (excluding any
impairment loss) at 30 September 20x5 amounted to R75 000. This machine is now
again in full production to support Machine A, and it is estimated that at 30 September
20x6 this machine will have a remaining useful life of three years, with a residual value of
R30 000. The recoverable amount of this machine is estimated at R280 000 at
30 September 20x6.

2.

The land and factory building are measured based on the revaluation model.
Revaluations are done at the beginning of each financial year. Revalued assets are disclosed
on the net basis, which means that accumulated depreciation is eliminated against the gross
carrying amount of the asset at each revaluation. The revaluation surplus is released to
retained earnings as the asset is depreciated.
The following details relate to the land and factory building:
Acquisition date: 1 October 20x3
Cost of land
Cost of building
Residual value of building (remained unchanged since acquisition date)

R750 000
R1 650 000
R250 000

Total useful life of building as estimated on 1 October 20x3 (unchanged

from acquisition date until 30 September 20x5)
Remaining useful life as estimated on 30 September 20x6

7 years
9 years

Market value (fair value) of land and building at:

1 October 20x4
1 October 20x5
1 October 20x6

Land
R800 000
R820 000
R880 000

Building
R1 702 000
R1 915 000
R2 050 000

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Chapter 4

Ignore VAT and other forms of taxation. The year-end of Factory 17 is 30 September.
Required:
Prepare the note disclosure relating to property, plant and equipment, to be included in the
notes to the financial statements of Factory 17 (Pty) Limited, for the year ended 30 September
20x6, in compliance with IAS16. Accounting policy notes and comparatives are NOT required.

Department of Accounting, UCT and Oxford University Press Southern Africa