Silic Case

Accy 510 Silic Case Homework appointment Name Yue (Josie) Deng Date June 11, 2012 1 On 01/01/2003, Silic should record the one-off, fine- hold dear revaluation as result of its adoption of SIIC tax regime. Because the building was appraised at 12,500 and originally bought at 10,000, the securely inescapably to make a journal entry to measure for this increase in value 01/01/2003 builds & footing2,500 followup redundant2,500 * Land & Building = 12,500 10,000 = 2,500 * As we learned in class from reading Silics financial statements, 82. % of the un acceptedized gains from revaluation will flow to the Revaluation Surplus account and 17. 1% will flow to the Other Creditors account. * 2,500 * 82. 9% = 2,072 * 2,500 * 17. 1% = 428 * However, in this cross case, we combine the two accounts for simplicity purposes. On 12/31/2003, Silic motivating to record a depreciation expense on the building. 12/31/2003 Charge to Depreciation500 Depreciation & nutriment 500 Revaluation Surpl us c amalgamated Reserves100 * As given in the question, the depreciation expense is 500.Silic depreciates its office and buildings on a straight- stock basis. We can deduce the useful animation of this particular building is 25 classs (12,500/500 = 25 years). * The company also needs to amortize the revaluation superabundance it originally recorded in result to the fair value revaluation based on the useful life of the building. 2,500/25 years = 100. The amortized amount moved to consolidated reserves (retained earnings). On 01/01/2004, Silic sold the building at 12,000 in cash. 01/01/2004 Cash 12,000 Depreciation & viands 2,900 Building & Land 12,500Gains on Disposal 2,400 Revaluation Surplus2,400 Consolidated Reserves 2,400 * The firm received 12,000 in cash by disposing the asset. The wage value of the building was 9,600 (12,500 2,900 = 9,600). Thus, the firm sold the building at a gain of 2,400. * In addition, the firm needs to clear the revaluation surplus of this bui lding to zero, and move the amount to consolidated reserves. 2 a) On 12/31/2012, Silic demolishes a fully-depreciated building. It needs to make the journal entry 12/31/2012 Charge to Depreciation Depreciation and ProvisionDepreciation & Provision 64,000 Buildings & Land64,000 * The firm needs to first record the depreciation expense for the last year of the assets useful life. The amount can non be determined by the given knowledge standd in the question. * We also need to clear this particular building from the balance sheet by debiting Depreciation & Provision (contra-asset account) and crediting Building & Land. b) No, this would not produce a faithful representation of Silics activities for the building. We unbosom need to amortize the revaluation surplus for the last year.It would not be representational faithful if the remaining value of fair-value mark-up still sits in the Revaluation Surplus account, because the gain is already realized through the depreciation of the as set. We need to amortize the remaining surplus to consolidated reserves to show the event. Although this journal entry may not necessarily affect the value of occur liabilities and equities, we still need to make sure to record this entry to provide investors with most representational faithful entropy. 3 01/01/2005 Buildings & Land93,863 Unrealized Gains on Land and Buildings93,863 The number is calculated by subtracting the historic personify of down and buildings on show up 4 from the fair value of these assets on exhibit 4b. * 1,681,493 (1,139,063 + 448,567) = 93,863 4 (a) From my point of view, cost business relationship method provides more relevant information to investors. According to FAC No. 8 Objectives of Financial Reporting, relevant financial information is capable of making a difference in the decisiveness made by users. The two most important characteristics are the informations predictive value and confirmatory value.As indicated in the case, Silic primarily competes in the French commercial- lieu market, which 72% (2004 data) of its earnings was derived from rental properties. As a result, its indifferent course of business centers around its leasing activities, and the fair market value of the properties is not a significant indicator of the companys performance. Thus, the fluctuation in the value of properties should not materially affect investors decision making. Since the 1980s, the commercial property market of Paris and its surrounding region had experienced substantial up(a) and downward movements in the values of properties.If we incorporate the change in the fair market value into the computation of net income, Silics skunk line would fluctuate significantly each year. However, the truth is the French real terra firma of the realm and property management industry had been growing steadily at an fairish rate of 2. 8% per year. The industry and the company have been on a steady growth trend. Investors would not be able c apture the real picture of the operating performance of the company if it switched to fair market accounting of properties.Therefore, I support the companys decision of measuring coronation property using the cost model. This election provides more relevant information to investors with regards to the companys operating performance. (b) I think historical cost accounting would present Silic in the most favorable coruscation oer time. As I discussed in part (a), the adoption of IAS no. 40 would require Silic to mark its investment properties to fair value during each account period, and report the gains and losses on its income statement.As indicated in the case, French real estate market had experienced substantial upward and downward movements in the value of properties. Thus, a probable outcome of fair value accounting would be a significant fluctuation in the firms bottom line during each reporting period. Fluctuations in net income signals great risk of the financial perform ance of an entity. A normal risk averse investors would not invest in an company that poses significant risk. Therefore, I believe historical cost accounting would present Silic in the most favorable light over time.