Reference no: EM13955936
Accounting for revaluations:
On 1 January 2016, Good Ltd acquired a block of land for $100000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100000 cash. Both companies intended to construct industrial warehouses on these properties. For the next 2 years, the property market went through a boom period and, by coincidence, on 30 June 2018, both companies obtained independent valuations of $180000 for their blocks of land.
Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2018 by following requirements of IAS 16/AASB 116. Better Ltd decided to use the cost model.
On 30 April 2019, each company sold its block of land for $200000 cash.
Required:
1. In relation to the land, how much profit would each company report for the years ended 30 June 2018 and 30 June 2019?
2. Give reason for the discrepancy in profit figures between the two companies. Does the existence of the discrepancy make sense? What message is being conveyed to users about the performance of both companies? Discuss fully. How can the discrepancy be avoided?
3. What profit would Good Ltd have made for the year ended 30 June 2019 if the revaluation of land had occurred on 29 April 2019, instead of on 30 June 2018? Compare this with the profit made by Better Ltd in the same year, and explain whether you regard the differences as satisfactory reporting.
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