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Following a delayering exercise, Carter vacated an office building and let it out to a third party on 30 June 2018. The building had an original cost of GHS900,000 on 1 January 2010 and was being depreciated over 50 years. It was judged to have a fair value on 30 June 2018 of GHS950,000. At the year end date of 31 December 2018, the fair value of the building was estimated at GHS1.2 million. Carter uses the fair value model for investment property. What amount will be shown in revaluation surplus at 31 December 2018 in respect of this building?a.GHS 250,000b.GHS 300,000c.GHS 203,000d.GHS 417,000

Question

Following a delayering exercise, Carter vacated an office building and let it out to a third party on 30 June 2018. The building had an original cost of GHS900,000 on 1 January 2010 and was being depreciated over 50 years. It was judged to have a fair value on 30 June 2018 of GHS950,000. At the year end date of 31 December 2018, the fair value of the building was estimated at GHS1.2 million. Carter uses the fair value model for investment property. What amount will be shown in revaluation surplus at 31 December 2018 in respect of this building?a.GHS 250,000b.GHS 300,000c.GHS 203,000d.GHS 417,000

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Solution

To answer this question, we first need to understand how the fair value model for investment property works. Under this model, investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, all investment properties are measured at fair value. Gains or losses arising from changes in the fair value are included in profit or loss in the period in which they arise.

Here are the steps to calculate the revaluation surplus:

  1. Calculate the depreciation for the period from 1 January 2010 to 30 June 2018. The building was being depreciated over 50 years, so the annual depreciation is GHS900,000 / 50 = GHS18,000. The depreciation for the period is 8.5 years * GHS18,000 = GHS153,000.

  2. Calculate the carrying amount of the building on 30 June 2018. This is the original cost minus the accumulated depreciation: GHS900,000 - GHS153,000 = GHS747,000.

  3. Calculate the revaluation surplus on 30 June 2018. This is the fair value minus the carrying amount: GHS950,000 - GHS747,000 = GHS203,000.

  4. Calculate the revaluation surplus on 31 December 2018. This is the fair value on that date minus the carrying amount on 30 June 2018 (since there is no further depreciation under the fair value model): GHS1.2 million - GHS747,000 = GHS453,000.

  5. The amount shown in revaluation surplus at 31 December 2018 in respect of this building is the difference between the revaluation surplus on 31 December 2018 and the revaluation surplus on 30 June 2018: GHS453,000 - GHS203,000 = GHS250,000.

So, the answer is a. GHS 250,000.

This problem has been solved

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