On July 1, 2020, Lucas Ltd., a publicly listed company, acquired assets from Jared Ltd. On the transaction date, a reliable, independent valuator assessed the fair values of these assets as follows:

Manufacturing plant (building #1) .................. $400,000
Storage warehouse (building #2) ...................... 210,000
Machinery (in building #1) ................................... 75,000
Machinery (in building #2) ................................... 45,000

The buildings are owned by the company, and the land that the buildings are situated on is owned by the local municipality and is provided free of charge to the owner of the buildings to encourage local employment.

In exchange for the acquisition of these assets, Lucas issued 156,000 common shares. Lucas’s shares are thinly traded (that is, traded in relatively low volume leading to more volatile price changes than most public companies). In the most recent sale of Lucas’s shares on the Toronto Stock Exchange, 1,000 shares were sold for $5 per share. At the time of acquisition, both buildings were considered to have an expected remaining useful life of 10 years, the machinery in building #1 was expected to have a remaining useful life of 3 years, and the machinery in building #2 was expected to have a useful life of 9 years. Lucas uses straight-line depreciation with no residual values.

At December 31, 2020, Lucas’s fiscal year end, Lucas recorded the correct depreciation amounts for the six months that the assets were in use. An independent appraisal concluded that the assets had the following fair values:

Manufacturing plant (building #1) ....................... $387,000
Storage warehouse (building #2) ........................... 178,000

At December 31, 2021, Lucas once again retained an independent appraiser and determined that the fair value of the assets was:
Manufacturing plant (building #1) ...................... $340,000
Storage warehouse (building #2) .......................... 160,000

Instructions

a. Prepare the journal entries required for 2020 and 2021, assuming that the buildings are accounted for under the revaluation model (using the asset adjustment method), and that the machinery is accounted for under the cost model. Do not combine the buildings in one account nor the machinery in one account. Depreciate assets separately and round all amounts to the nearest dollar.

b. Assume that the asset revaluation surplus for the buildings was prepared based on a class-by-class basis rather than on an individual asset basis as required by IAS 16. Prepare the journal entries for 2020 and 2021 that relate to the buildings. (Ignore the machinery accounts since they are accounted for using the cost model.)

c. Comment on the effects on the 2020 income statement with respect to parts (a) and (b).