On July I, 2014, Lucas Ltd., a publicly listed company, acquired assets from Jared Ltd. On the transaction date, a reliable, independent valuator assessed the fair values of these assets as follows:
Manufacturing plant (building #1) ............... $400,000
Storage warehouse (building #2) ............... 210,000
Machinery (in building Ill) ................. 75,000
Machinery (in building #2) ................. 45,000
The buildings are owned by the company and the land that the buildings are situated on is owned by the local municipality and is provided free of charge to the owner of the buildings as a stimulus to encourage local employment.
In exchange for the acquisition of these assets, Lucas issued 156,000 common shares. Lucas's shares are thinly traded, and in the most recent sale of Lucas's shares on the Toronto Stock Exchange, 1,000 shares were sold for $5 per share. At the time of acquisition, both buildings were considered to have an expected remaining useful life of 10 years, the machinery in building #I was expected to have a remaining useful life of 3 years, and the machinery in building #2 was expected to have a useful life of 9 years. Lucas uses straight-line depreciation.
At December 31, 2014, Lucas~ fiscal year end, Lucas recorded the correct depreciation amounts for the six months that the assets were in use. An independent appraisal concluded that the assets had the following fair values:
Manufacturing plant (building #1) ............... $387,000
Storage warehouse (building #2) .............. 178,000
At December 31, 2015, Lucas once again retained an independent appraiser and determined that the fair value of the assets was:
Manufacturing plant (building #1) ............... $340,000
Storage warehouse (building #2) .............. 160,000
Instructions
(a) Prepare the journal entries required for 2014 and 2015, assuming that the buildings are accounted for under the revaluation model (using the asset adjustment method), and that the machinery is accounted for under the cost model.
(b) Assume that the asset revaluation surplus for the buildings was prepared based on a class-by-class basis rather than on an individual asset basis as required by !AS 16. Prepare the journal entries required for 2014 and 2015 that relate to the buildings. (Ignore the machinery accounts since they are accounted for using the cost model.)
(c) Comment on the effects on the 2014 income statement with respect to parts (a) and (b).