XYZ, a manufacturing company, purchases a property for Ghs1m on 1 January 2016 for its investment potential. The land element of the cost is believed to be Ghs 400,000 and the buildings element is expected to have a useful life of 50 years. At 31 December 2016, local property indices suggest that the fair value of the property has risen to Ghs1.1m. Requirement Explain how the property would be presented in the financial statements as at 31 December 2016 if XYZ adopts the: (i) Cost model; and (ii) Fair value model.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Investment property
Q1
XYZ, a manufacturing company, purchases a property for Ghs1m on 1 January 2016 for its investment potential. The land element of the cost is believed to be Ghs 400,000 and the buildings element is expected to have a useful life of 50 years. At 31 December 2016, local property indices suggest that the fair value of the property has risen to Ghs1.1m.
Requirement
Explain how the property would be presented in the financial statements as at 31 December 2016 if XYZ adopts the:
(i) Cost model; and
(ii) Fair value model.
Step by step
Solved in 3 steps with 4 images
