On December 1, 20X0, AKE Pte Ltd paid $5,000 to a Real Estate consulting company for a market report of the property market. The market survey was favourable and AKE Pte Ltd decided to make an entry into the property market. On January 1, 20X1 the company purchased two buildings paying $800,000 for Building X and $1,200,000 for Building Y. The company paid $20,000 to the property agent and incurred an additional $80,000 legal fee to finalise the transaction. Both buildings have useful life of 40 years and zero residual value. The company uses straight- line method for depreciation of all its non-current assets. The company intends to use Building X as their office and rent out Building Y. The company adopts revaluation model for its PPE and fair value model for its investment property. Any accumulated depreciation at the date of the revaluation will be eliminated against the gross carrying amount of the asset. At the end of the year 20X1, values of the two buildings were as below: FVLCS (S) VIU (S) 850,000 900,000 Item Building X Building Y 1,300,000 To improve cash flows for 20X2, the company decided to sell the two buildings. On September 30, 20X2 Building X was sold for $920,000 and Building Y was sold for $1,450,000. The company paid the property agent a fee of $12,000 for brokering the sales. Required: Illustrate the proper accounting treatment for the two buildings under the International Financial Reporting Standards. Workings and explanation must be clearly shown.
On December 1, 20X0, AKE Pte Ltd paid $5,000 to a Real Estate consulting company for a market report of the property market. The market survey was favourable and AKE Pte Ltd decided to make an entry into the property market. On January 1, 20X1 the company purchased two buildings paying $800,000 for Building X and $1,200,000 for Building Y. The company paid $20,000 to the property agent and incurred an additional $80,000 legal fee to finalise the transaction. Both buildings have useful life of 40 years and zero residual value. The company uses straight- line method for depreciation of all its non-current assets. The company intends to use Building X as their office and rent out Building Y. The company adopts revaluation model for its PPE and fair value model for its investment property. Any accumulated depreciation at the date of the revaluation will be eliminated against the gross carrying amount of the asset. At the end of the year 20X1, values of the two buildings were as below: FVLCS (S) VIU (S) 850,000 900,000 Item Building X Building Y 1,300,000 To improve cash flows for 20X2, the company decided to sell the two buildings. On September 30, 20X2 Building X was sold for $920,000 and Building Y was sold for $1,450,000. The company paid the property agent a fee of $12,000 for brokering the sales. Required: Illustrate the proper accounting treatment for the two buildings under the International Financial Reporting Standards. Workings and explanation must be clearly shown.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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.
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