Question - The following information is provided for the motor vehicles of Lan Zen Ltd (LZ Ltd). The directors of LZ Ltd decided to account for the vehicles using revaluation model and to depreciate these assets using straight-line method.
1953 Rolls Royce Silver Dawn LHD:
This car had a revalued amount as at 31 December 2015 of $120,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016.
This car was revalued for the first time on 31 December 2015, from $130,000 to $120,000. The directors determined that as at 31 December 2015, the car had an estimated remaining useful life of 4 years, and an estimated residual value of $20,000.
The directors have determined that the fair value of this car on 31 December 2016 is $116,000.
Ford F-450 Platinum Truck:
This truck had a revalued amount as at 31 December 2015 of $40,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016.
This truck has been revalued a number of times, with revaluation decrements amounting to $24,000 being previously recognised in statement of profit or loss and other comprehensive income. The directors determined that as at 31 December 2015, the truck had an estimated remaining useful life of 2 years, and an estimated residual value of $8,000.
The directors have determined that the fair value of the truck on 31 December 2016 is $18,000.
Assume a tax rate of 30%.
Required:
(i) Prepare the necessary journal entries to record depreciation and the revaluation entries for each vehicle of LZ Ltd for the year ended 31 December 2016. Show all relevant workings.
(ii) In accounting for a depreciable asset, how does a revaluation increment affect an entity's reported profits in subsequent periods? Explain your answers by using an example.