Mega Ltd acquired a three-story building for use as an office on 1 January 2016 at $2 million. The building was expected to have a useful life of 20 years and a residual value of $100,000. The company used straight-line method to depreciate its building. The fair value of the building was $2.2 million and $1.9 million on 31 December 2016 and 2017 respectively. On 1 July 2018, Mega Ltd rented out the building to an unrelated party in an arm’s length transaction. The company used fair value model to account for its investment properties. The fair value of the building was $3 million on 1 July 2018. The building was eventually sold for $3.1 million on 31 December 2018. Mega Ltd used the revaluation model for its property plant and equipment and revaluation surplus would not transfer to retained earnings annually. It used fair value model for its investment properties. Required: (a) Prepare the accounting journal entries for the building on 31 December 2016 and 2017. Show your workings. (b) Prepare the accounting journal entries for the building in 2018. Show your workings.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Mega Ltd acquired a three-story building for use as an office on 1 January 2016 at $2 million. The building was expected to have a useful life of 20 years and a residual value of $100,000. The company used straight-line method to
On 1 July 2018, Mega Ltd rented out the building to an unrelated party in an arm’s length transaction. The company used fair value model to account for its investment properties. The fair value of the building was $3 million on 1 July 2018. The building was eventually sold for $3.1 million on 31 December 2018.
Mega Ltd used the revaluation model for its property plant and equipment and revaluation surplus would not transfer to
Required:
-
(a) Prepare the accounting
journal entries for the building on 31 December 2016 and 2017. Show your workings. -
(b) Prepare the accounting journal entries for the building in 2018. Show your workings.
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