Name: Yue (Josie) Deng
Date: June 11, 2012
On 01/01/2003, Silic should record the one-off, fair-value revaluation as result of its adoption of SIIC tax regime. Because the building was appraised at €12,500 and originally bought at €10,000, the firm needs to make a journal entry to account for this increase in value
Buildings & Land€2,500
* Land & Building = €12,500 - €10,000 = €2,500
* As we learned in class from reading Silic’s financial statements, 82.9% of the unrealized gains from revaluation will flow to the Revaluation Surplus account and 17.1% will flow to the Other Creditors account. * €2,500 * 82.9% = €2,072
* €2,500 * 17.1% = €428
* However, in this particular case, we combine the two accounts for simplicity purposes.
On 12/31/2003, Silic need to record a depreciation expense on the building.
Charge to Depreciation€500
Depreciation & Provisions €500
Revaluation Surplus €100
* As given in the question, the depreciation expense is €500. Silic depreciates its office and buildings on a straight-line basis. We can deduce the useful life of this particular building is 25 years (€12,500/€500 = 25 years). * The company also needs to amortize the revaluation surplus it originally recorded in response to the fair value revaluation based on the useful life of the building. €2,500/25 years = €100. The amortized amount moved to consolidated reserves (retained earnings).
On 01/01/2004, Silic sold the building at €12,000 in cash.
Depreciation & Provisions €2,900
Building & Land €12,500
Gains on Disposal €2,400
Consolidated Reserves €2,400
* The firm received €12,000 in cash by disposing the asset. The net value of the building was €9,600 (€12,500 - €2,900 = €9,600). Thus, the firm sold the building at a gain of €2,400. * In addition, the firm needs to clear the revaluation surplus of this building to zero, and move the amount to consolidated reserves.
a) On 12/31/2012, Silic demolishes a fully-depreciated building. It needs to make the journal entry:
Charge to Depreciation
Depreciation and Provision
Depreciation & Provision €64,000
Buildings & Land€64,000
* The firm needs to first record the depreciation expense for the last year of the asset’s useful life. The amount cannot be determined by the given information provided in the question. * We also need to clear this particular building from the balance sheet by debiting Depreciation & Provision (contra-asset account) and crediting Building & Land.
b) No, this would not produce a faithful representation of Silic’s activities for the building. We still need to amortize the revaluation surplus for the last year. It would not be representational faithful if the remaining value of fair-value mark-up still sits in the Revaluation Surplus account, because the gain is already realized through the depreciation of the asset. We need to amortize the remaining surplus to consolidated reserves to show the event. Although this journal entry may not necessarily affect the value of total liabilities and equities, we still need to make sure to record this entry to provide investors with most representational faithful information.
Buildings & Land€93,863
Unrealized Gains on Land and Buildings€93,863
* The number is calculated by subtracting the historical cost of land and buildings on exhibit 4 from the fair value of these assets on exhibit 4b. * €1,681,493 – (€1,139,063 + €448,567) = €93,863
From my point of view, cost accounting method provides more relevant information to investors. According to FAC No. 8 Objectives of Financial Reporting, “relevant...