Thomas Ltd uses the revaluation model and decides to revalue their machinery at

Question

Thomas Ltd uses the revaluation model and decides to revalue their machinery at 1 January 2016 as management believed that the carrying amount of the machinery was materially different from the fair value. The machinery was originally purchased for cash on 1 January 2015 and has not been previously straight-line over a useful life of 5 years, with no residual value. For tax purpose, the machine is being depreciated straight-line over 4 years. re-valued. The machines is being depreciated Details extracted from the financial statements at 31 December 2015 show the following: Carrying amount Cost Accumulated Depreciation Estimated fair value Asset Machinery 30,000 6,000 24,000 34,000 At the time of the revaluation (1 January 2016), the remaining useful life of the machinery was 4 years, straight-line depreciation, no residual value. Company income tax rate is 30%. Required: Record the general journal entries for: 1. The original purchase of the machinery; 2. The revaluation of the machinery at 1 January 2016; and 3. All depreciation and deferred tax related journals from 1 January 2015 to 31 December 2016.

Explanation / Answer

Answer:

Reason of highlighting in Tax Calculation Table:

2015

1.30000: Cost of Machinery (mentioned in question)

2.7500: Accumulated Dep. (it is calculated as per tax Purpose. It has been mentioned in the question that the machine is being depreciated straight-line over 4 years for tax purpose. Hence dep. is 30000/4= 7500)

3.22500: It is a carrying amount which comes after (30000 -   7500), which is (Cost of Machinery - Depreciation)

2016

1. 30000: Cost of Machinery (mentioned in question)

2.15000: accumulated Dep. (For Tax purpose the machinery will be depreciated as per straight- line method for 4 years. First year Dep. is 7500 and second year dep. will also be 7500. Hence, the accumulated depreciation in year 2 will be 7500+7500 = 15000)

3.15000: It is a carrying amount which comes after (30000 -   1500), which is (Cost of Machinery - Accumulated Depreciation)

Journal entry of dated 01/01/16

3000: Since machinery is revalued and its value is increased by $10000 ( $34000 - $24000). This revaluation will increase the Deferred tax liability as well @30%. Hence, deferred tax liability is 10000*30% = 3000

7000: This is the difference amount between the revaluation amount of machinery and deferred tax liability thereon ($1000 - $3000) = $7000

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