Silic Case

Accy 510 Silic slip of paper Homework Assignment Name Yue (Josie) Deng Date June 11, 2012 1 On 01/01/2003, Silic should insert the one-off, fair- mensurate limited review as go away of its adoption of SIIC tax regime. Because the building was appraised at 12, calciferol and originally bought at 10,000, the firm occupys to demonstrate a daybook entry to account for this increase in value 01/01/2003 Buildings & polish2,500 Revaluation Surplus2,500 * disembark & Building = 12,500 10,000 = 2,500 * As we learned in class from reading Silics financial statements, 82. % of the un cognize pull togethers from brushup 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 particular case, we combine the two accounts for simplicity purposes. On 12/31/2003, Silic need to record a depreciation expense on the building. 12/31/2003 Charge to Depreciation500 Depreciation & Provisi ons 500 Revaluation Surplus 100 Consolidated Reserves100 * As given in the question, the depreciation expense is 500.Silic depreciates its office and buildings on a straight-line basis. We can deduce the recyclable life of this particular building is 25 years (12,500/500 = 25 years). * The company also needs to amortize the revaluation surplus it originally recorded in response to the fair value revaluation based on the useful life of the building. 2,500/25 years = 100. The amortized amount moved to coalesced militia (retained earnings). On 01/01/2004, Silic sold the building at 12,000 in ex veer. 01/01/2004 Cash 12,000 Depreciation & Provisions 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 net 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 s urplus of this building 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 cannot be determined by the given culture provided in the question. * We also need to clear this particular building from the commensurateness sheet by debiting Depreciation & Provision (contra-asset account) and crediting Building & Land. b) No, this would not produce a faithful archetype of Silics activities for the building. We still need to amortize the revaluation surplus for the last year.It would not be depictive 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 deprecia tion of the asset. 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 total liabilities and equities, we still need to make sure to record this entry to provide investors with nigh representational faithful information. 3 01/01/2005 Buildings & Land93,863 unsuccessful Gains on Land and Buildings93,863 The number is calculated by subtracting the historical cost of land and buildings on let out 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 accounting system 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 decision made by users. The two almost important characteristics are the informations predictive value and confirmatory value.As indicated in the case, Silic primari ly competes in the French commercial-property market, which 72% (2004 data) of its earnings was derived from rental properties. As a result, its ordinary course of business centers round its leasing activities, and the fair market value of the properties is not a significant indicator of the companys cognitive operation. Thus, the variant in the value of properties should not materially affect investors decision making. Since the 1980s, the commercial property market of genus Paris and its surrounding region had experienced substantial upward 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 bottom line would oscillate significantly each year. However, the truth is the French real estate and property management industry had been evolution steadily at an average rate of 2. 8% per year. The industry and the company have been on a steady growth trend. Investors would not be able capt ure 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 amount investment 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 prospering light over time. As I discussed in part (a), the adoption of IAS no. 40 would request Silic to mark its investment properties to fair value during each reporting 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 massive risk of the financial performance 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.