Revaluation of property, plant and equipment

Property, plant and equipment

Star Freight Ltd is a local freight company with a fleet of three trucks, and you are employed as the financial accountant. The company has always used the cost model to account for its trucks, and elects to depreciate its trucks using the straight-line method.

At 30 June 2018, the Star Freight Ltd has the following the following amounts recognised in its financial statements for the trucks:

	Truck 1	Truck 2	Truck 3
Original cost	$180,000	$220,000	$300,000
Less: accumulated depreciation	(50,000)	(40,000)	(60,000)
Carrying amount	130,000	180,000	240,000

The directors have heard the term revaluation model used before, and would like to consider using the revaluation model for the trucks from 1 July 2018, so that the amounts recognised in the financial statements better reflect the market values of the trucks. You ask the directors for the following information: the fair value of each truck, the remaining useful life of each truck, and the estimated residual value of each truck.

The directors provide you with the following information:

	Truck 1	Truck 2	Truck 3
Fair value as at 1 July 2018	$140,000	$200,000	$210,000
Remaining useful life as at 1 July 2018	8 years	10 years	12 years
Estimated residual value	20,000	30,000	30,000

Required:

Prepare a memo to the directors of Star Freight Ltd, explaining 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.

In your memo, prepare journal entries that would be required for the revaluations on 1 July 2018, to illustrate the application of the revaluation model to the directors. Show narrations. Note: you are not required to account for income tax associated with revaluations.

To help the directors understand how subsequent revaluations would be accounted for, you also need to provide them with an illustrative example in your memo. For the purposes of this example, assume that the fair values of the trucks at 30 June 2019 are: $110,000 for truck 1, $175,000 for truck 2, and $220,000 for truck 3. Prepare journal entries that would be required for depreciation and the revaluations on 30 June 2019. Show narrations and workings for depreciation and revaluations. Note: you are not required to account for income tax associated with revaluations.