Question 3

Automation Ltd is a manufacturer of healthcare products and it has recently invested in two robots: Alfie and Rosey. The company has always used the cost model to account for its machinery, and elects to depreciate the machinery using the straight-line method.

At 30 June 2020, Automation Ltd has the following amounts recognised in its financial statements for the robots:

	Alfie	Rosey
Original cost	$360,000	$600,000
Less: accumulated depreciation	(100,000)	(120,000)
Carrying amount	260,000	480,000

The directors are considering using the revaluation model for the robots from 1 July 2020, so that the amounts recognised in the financial statements better reflect the market values of the robots. However, they are unsure of the accounting impact brought about by the revaluation methods, if adopted.

The directors provide you with the following information, estimated as at 1 July 2020:

	Alfie	Rosey
Fair value	$280,000	$420,000
Remaining useful life	8 years	10 years
Estimated residual value	40,000	60,000

Required:

1. Explain to the directors of Automation Ltd the key aspects of the revaluation model: how revaluations are accounted for under AASB 116; how often assets need to be revalued, and how depreciation expense is impacted. Provide references to key paragraphs in AASB 116 to support your discussion.
2. Prepare journal entries that would be required for the revaluations on 1 July 2020, to illustrate the application of the revaluation model to the directors. Show narrations. Note: ignore tax effect arising from the revaluations.
3. Assuming that the fair values of Alfie and Rosey at 1 July 2021 are: $220,000 and $400,000 respectively, prepare journal entries that would be required for depreciation and the revaluations entries required as at 1 July 2021. No change is expected in relation to the useful life and residual value estimated prior. Show narrations and workings for depreciation and revaluations. Note: ignore tax effect arising from the revaluations

Question 3	Max. marks allocated
Discussion [Part (i)]	3
2020 journal entries [Part (ii)]	4
2021 journal entries [Part (iii)]	5
2021 journal entries [Part (iii)] - workings	2
Total	14