ABC Ltd owns a property which was purchased on 1 January 2010 for $1,000,000, of which $400,000 was considered to be related to the land on which the building is situated. The company has followed a policy of depreciating the building at the rate of 4 per cent on cost per annum. On 31 December 2014 the property was valued by a firm of chartered surveyors at $1,800,000 of which $900,000 was considered attributable to the value of the land. The surveyors further estimated that the property possessed a remaining useful life of 30 years from 1 January 2015. The property market went down in 2015. The property was valued by the surveyors again on 31 December 2015. The fair value of the property became $1,600,000 and $600,000 was considered attributable to the value of the building.
ABC Ltd has another property in City A for capital appreciation. The building was acquired in 2001 for $3,000,000. The estimated useful life of this building was 25 years. The fair value of this building on 31 December 2015 was $2,700,000. ABC Ltd has adopted the revaluation model for its property, plant and equipment and the fair value model for its investment properties.
a. Using the above information, prepare accounting journal entries for ABC Ltd in 2014 and 2015.
b. Show the details relating to the properties which would appear in the statement of financial position and statement of profit or loss and other comprehensive income of ABC Ltd on 31 December 2015.
c. Why is residual value of property, plant and equipment normally zero?