QUESTION TWO 5 marks Numac also owns some land in Footscray

QUESTION TWO (5 marks) Numac also owns some land in Footscray, approximately 15 km from the Metro Tunnel rail construction site which was purchased at a cost of $6,000,000 on 30 June 2012. After carrying the land at cost, on 30 June 2016 Numac decides to use revaluation model, as the area has strongly increased in market value, due to planning and subdivision rules, resulting in the lands fair value increasing to $6,700,000. After one year, on 30 June 2017, due to amendments in the said rule on account of environmental concern, the commercial attractiveness of the area has dropped resulting in the land fair value dropping to $5,900,000. REQUIRED a) Determine the value of land to be recorded in the accounts under the revaluation model as at 30 June 2016 and 2017 (0.5 mark). b) Provide the journal entry/ies to account for the revaluation of land ending 30 June 2016? (1.0 mark)- Ignore any tax implications. c) Account for the land on 30 June 2017, showing all workings supporting your answer (1.5 marks) -Ignore any tax implications. d) Assume that the managers of Numac in 2015 were trying to obtain a relevant loan from ANZ Bank. As part of the banks due diligence they review the company\'s solvency or ability to pay debt as measured by the debt/ asset ratio. Explain if any the implications of a revaluation upwards on this ratio and the prospects of Numac securing the loan? (2 marks)

Solution

a)Value of Land

30.06.2016 =6700000$

30.06.2017= 5900000$

B)journal Entry For 30.06 2016

Land A/c Dr 700000$

To Revaluation Reserve A/c 700000$

(Being Revaluation Reserve On land Created)

C)Account for 30.06 2017

Revaluation Reserve A/c Dr 700000$

Impairment Loss A/c Dr 100000$

To Land A/c 800000$

(Being land valued at fair value)

Profit and Loss A/c 100000$

Impairment Loss A/c 100000$

(Being impairment loss transferred to profit and loss account)

Working Note

Land Cost 30. 06. 2016 6700000$

Less: land fair value 30.06.2017 5900000$

Difference 800000$

700000$ out of above 800000$ adjusted to Ravluation Raserve earlier created and Balance portion 100000$ is impairment loss(ie. Fair value less than carrying cost) so this loss will be transfered to Profit and loss A/c immediately

D) the Revaluation Reserve not included in the computation of Debt Assets Ratio. If this amount included the management decision is vary the on the basis of Ratio.