$3\mathrm{.}4$ Revaluation and impairment of fixed assets

Assume that early in $x2$ a European hotel chain buys a hotel in Asia for cash. The fair value of

the hotel building then is $75$ million. The hotel chain depreciates buildings on a straight$-$line

basis over $20$ years and assumes a zero residual value. The following events occur over the six

years to the end of $x7$ :

At the end of $x2,$ professional valuers perform a valuation of all the hotel chain's hotels.

These external valuations usually occur every three years. The valuers estimate the

current market value of the Asian hotel building at $81$ million.

In $x4,$ there is an economic crisis in Asia. Hotel occupancy rates fall sharply. At the end

of $x4,$ the management of the hotel chain carries out an impairment review $($after

recording depreciation for the year$).$ They estimate the value of the Asian hotel building

in its existing use to be $45$ million. But developers express interest in the property for

conversion to mixed office, and residential use, and their net offer price is $49\mathrm{.}5$ million.

At the end of $x5,$ the triennial valuation of the hotel chain's properties is carried out $($see

$(1)).$ Economic conditions are still difficult. No revaluation of the Asian hotel occurs

then.

The Asian economy rebounds in $x6.$ At the end of $x6,$ management carries out an

impairment review $($after recording depreciation for the year$)$ and estimates the Asian

building's recoverable amount at $63$ million then.

At the end of $x7,$ the hotel is sold for a total consideration of $58\mathrm{.}8$ million $($the fair

value at that time$).$

Required:

$($a$)$ Assume the hotel chain uses the cost principle to value its land and buildings $($i$.$e$.,$ amortized

cost$).$ Show the effect on the company's accounts of the purchase of the Asian hotel building

in $x2$ and the changes in its carrying amount each year over the six years to end$-x7.$

$($b$)$ Assume the hotel chain measures its land and buildings at revalued amounts $($i$.$e$.,$ fair

value$).$ Show the effects on the company's accounts of the changes in the Asian hotel building

each year over the six years to end$-$x$7.$ The firm does not use the option of transferring

unrecognized gains from other comprehensive income to retained earnings.