On 30 June 2020, ABC Limited had an item of plant with an original cost of $100000 and accumulated depreciation of $20000. At this date, the fair value of the plant was $90000. The net effect of the journal entries necessary to record the revaluation of the plant by ABC Ltd to fair value on 30 June 2020 in accordance with AASB 116 Property, Plant and Equipment is (ignore the tax)?
a.DR Accumulated Depreciation 20000; Cr Plant 10000; Cr Asset revaluation surplus 10000
b.DR Accumulated Depreciation 20000; Cr Plant 10000; Cr Retained earnings 10000
c.None of the answer is correct
d.DR Accumulated Depreciation 20000; Dr Plant 10000; Cr Asset revaluation surplus 30000
The correct journal entry to record the revaluation of the plant by ABC Ltd to fair value on June 30, 2020, in accordance with AASB 116 Property, Plant and Equipment is option D:
d. DR Accumulated Depreciation 20000; Dr Plant 10000; Cr Asset revaluation surplus 30000
Let’s break down the journal entry and explain the reasoning behind each part of it:
DR Accumulated Depreciation 20000: This entry debits (DR) the Accumulated Depreciation account by $20,000. Accumulated Depreciation represents the total depreciation expense recognized on the plant up to that point. When revaluing an asset, you need to remove the previously recognized depreciation related to the old carrying amount to reflect the new fair value. This is done by debiting Accumulated Depreciation.
Dr Plant 10000: This entry debits (DR) the Plant account by $10,000. The original cost of the plant was $100,000, and it has been revalued downward to $90,000 (fair value). The $10,000 difference represents the decrease in the value of the plant. Therefore, we need to reduce the Plant account accordingly.
Cr Asset Revaluation Surplus 30000: This entry credits (CR) the Asset Revaluation Surplus account by $30,000. Asset Revaluation Surplus is a component of equity used to record increases or decreases in the value of an asset when it is revalued. In this case, the plant’s fair value has decreased by $10,000, resulting in a debit of $10,000 to the Plant account and a credit of $30,000 to the Asset Revaluation Surplus account to account for the decrease in value.
Option D correctly reflects the revaluation of the plant to its fair value while taking into account the removal of previously recognized depreciation and the decrease in the asset’s carrying amount. This journal entry is in accordance with the accounting standards and principles outlined in AASB 116 Property, Plant and Equipment.
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