Applying accounting theory to property, plant and equipment Beatrix was recently appointed as the accountant for Lorikeet Ltd. She was surprised to learn that the company uses the cost model for its buildings. Her previous employer, Raven Ltd, had used the revaluation model for its buildings.

Eager to make a good impression with management, Beatrix proposed to adopt the fair value model for buildings, effective from 1 July 2023, in preparing the financial statements of Lorikeet Ltd for the year ended 30 June 2024. She presented the following analysis to senior management to show the effect of adopting the revaluation model.

Additional information - Profit before interest and taxes is usually about \(\$ 20\) million each year.
- The remaining useful life of the buildings is 10 years.
- Lorikeet Ltd's senior management are paid a fixed salary plus a share-based bonus if return on investment (ROI) exceeds \(10 \%\), where \(\mathrm{ROI}\) is calculated as profit before interest and taxes/total assets at the beginning of the year.

Required 

1. Calculate the effect of the revaluation of buildings on depreciation expense for the year ended 30 June 2024. Assume the straight-line depreciation method is used.

2. Using the positive accounting theory perspective discussed in chapter 2 of this text, explain why senior management of Lorikeet Ltd might not be in favour of adopting the revaluation model for buildings.

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LORIKEET LTD Summarised statement of financial position at 1 July 2023 Cost model Revaluation SM SM Other assets Buildings (net) Total assets Liabilities 80 80 70 120 150 200 50 50 Equity 100 150 Total liabilities and equity 150 200