Garter Inns is a hotel chain with small but fast-growing international operations. Early in x2 it buys
Question:
Garter Inns is a hotel chain with small but fast-growing international operations. Early in x2 it buys a hotel in Thailand for cash. The fair value of the hotel building then is 50. (All amounts are in millions of euros.) Garter Inns depreciates hotel buildings on a straight-line basis over 25 years and assumes a zero residual value.
The following events occur over the five years to end-x6:
1 Professional valuers carry out a valuation of all Garter Inns hotels at the end of x2. These external valuations usually occur every three years. The valuers estimate the current market value of the Thai hotel building at 54.
2 There is an economic crisis in Asia in x4. Hotel occupancy rates fall sharply. Garter’s management carry out an impairment review at the end of x4 (after recording depreciation for the year). They estimate the value of the Thai building in its existing use to be 30. But developers express interest in the property for conversion to mixed office and residential use and their net offer price is 33.
3 Economic conditions are still difficult at the end of x5 when the triennial valuation of Garter’s prop- erties occurs. No revaluation of the Thai hotel occurs then.
4 The Asian economy rebounds in x6. Management carry out an impairment review at the end of x6 (after recording depreciation for the year) and estimate the Thai building’s recoverable amount at 42 then. Garter Inns prepares its accounts according to international accounting standards.
Required
(a) Assume Garter Inns measures its land and buildings at depreciated cost. Show the effect on the company’s accounts of: (i) the purchase of the Thai hotel building in x2; (ii) the changes in its carrying amount each year over the five years to end-x6. Use journal entries or the balance sheet equation.
(b) Assume Garter Inns measures its land and buildings at revalued amounts. It carries buildings in its accounts at their net amount (i.e. it does not show accumulated depreciation separately). Show the effect on the company’s accounts of the changes in the carrying amount of the Thai hotel building each year over the five years to end-x6. Check figures: Loss (in x4) from asset write-down
Expert Answer:
This appears to be an accounting question related to the treatment of property plant and equipment specifically a hotel building and the impact of eve... View the full answer
