On 1 January 2019, Good Ltd acquired a block of land for $100 000 cash, and on

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On 1 January 2019, Good Ltd acquired a block of land for $100 000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100 000 cash. Both companies intended to construct industrial warehouses on these properties.

For the next 2 years, the property market went through a boom period and, by coincidence, on 30 June 2021, both companies obtained independent valuations of $180 000 for their blocks of land.

Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2021 by following the requirements of IAS 16/AASB 116. Better Ltd decided to use the cost model.

On 30 April 2022, each company sold its block of land for $200 000 cash.

Required

(a) In relation to the land, how much profit would each company report for the years ended 30 June 2021 and 30 June 2022?

(b) Give reasons for the discrepancy in profit figures between the two companies. Does the existence of the discrepancy make sense? What message is being conveyed to users about the performance of both companies? Discuss fully. How can the discrepancy be avoided?

(c) What profit would Good Ltd have made for the year ended 30 June 2022 if the revaluation of land had occurred on 29 April 2022, instead of on 30 June 2021? Compare this with the profit made by Better Ltd in the same year, and explain whether you regard the differences as satisfactory reporting.

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Financial Accounting

ISBN: 9780730363217

10th Edition

Authors: John Hoggett, John Medlin, Keryn Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield

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