Problem
North Ltd is a manufacturing company. The following asset information is extracted from its property, plant, and equipment schedule on 1 July 2022:
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$
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Plant - North Rye
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1,450,000
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Less Accumulated depreciation - North Rye plant
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(116,000)
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Plant - West St
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850,000
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Less Accumulated depreciation - West St plant
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(42,500)
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The plant in North Rye and West St were acquired on 1 July 2020 and 1 July 2021 respectively. All plant is to be depreciated on a straight-line basis and the useful life for the North Rye and West St plants were assessed to be 25 years and 20 years respectively, with no residual value.
Due to the location, the plant in North Rye has more prospects than the one on West St. To take advantage of the situation, the directors suggested you adopt the revaluation model for the North Rye plant while continue to value the West St plant using the cost model. Unsure of the accounting implications, the directors have approached you, the accountant, for advice.
Upon review of both the plant on 1 July 2022, you have gathered the following information on that date:
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Remaining useful life
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Residual value
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North Rye plant
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25 years
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Nil
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West St plant
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17 years
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Nil
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Task
I. Advise the directors if their suggestions can be adopted. Support your answers with references made to AASB 116.
II. Assume now the directors have decided to adopt the revaluation model for all plant from 30 June 2023. On that date, the fair value was $1,350,000 and $738,000 respectively for the North Rye and West St plant. Given this information, determine if there is any gain or loss on revaluation for the plant on 30 June 2023.
III. Advise the directors if any gain on revaluation from one plant can be used to offset any loss on revaluation for the other? Why? Provide reference made to AASB 116.
IV. Show all relevant journal entries required to record the depreciation and revaluation for the plant in North Ltd's financial statements for the year ended 30 June 2023. Ignore any tax effect.
V. Explain how professional judgement would have been applied in the above revaluation transactions.