QUESTION 3 (13 MARKS)
Mumu (Pty) Ltd is a company that manufactures a variety of dairy products for sale in
supermarkets and coffee shops around South Africa. The company has a factory in Thembisa
and commercial property in Commissioner Street.
The following is an extract from the Mumu (Pty) Ltd’s Statement of Financial Position as at 30
June 2013 before the valuation done by Mr. Clover. An independent valuator, Mr. Clover, was
hired by Mumu (Pty) Ltd to value both the factory and the commercial property.
Extract of Financial Statements as at 30 June 2013
R R
2013 2012
Property, plant and equipment:
COST:
• Commercial property- Fair Value ? 7 308 000
• Plant / factory
(including land upon which this has been built) 58 912 000 58 912 000
ACCUMULATED DEPRECIATION:
• Commercial Property ? (974 400)
• Plant/factory
(including land upon which this has been built) (17 673 600) (11 782 400)
Commercial Property - Commissioner Street:
The commercial property is currently held by Mumu (Pty) Ltd for future expansion. The
property was acquired on 1 July 2008 and at that date the financial manager estimated the
useful life of the property to be 30 years. Due to the current economic conditions it was
decided that the expansion should be halted and the property to be rented out. The property
is being rented out to Danonee Ltd as of 1 January 2013.
Due to the growing demand for office property in the Johannesburg central business district
as well as the increase in the value of property noted as a direct result of the restoration
project in the city centre, the commercial property was valued at the market selling price.
This price was determined by way of a comparison of comparative properties and the selling
prices that they realised, adjusted for changes in the market, area, inflation, etc. Based on the
independent appraisers evaluation of the market it estimated that the property (including
land and buildings) could be sold for R10 500 000 at 1 January 2013 and R15 000 000 as at 30 June 2013.
All owner occupied property is accounted for on the revaluation model in terms of
IAS16. Revaluation of property is as per the net replacement value method.
The company accounts for investment property based on the fair value model in terms
of IAS 40.
You are required to:
Prepare the necessary journal entries to account for the valuation with respect to the
commercial property in Commissioner Street.
Narrations are required.
Ignore all the related tax and deferred tax entries.
(13 marks)
Journal Entries:
1. Revaluation of commercial property as at 1 January 2013:
Commercial Property (Dr) 2 191 400
Revaluation Surplus (Cr) 2 191 400
- To record the increase in the fair value of the commercial property as at 1 January 2013.
2. Revaluation of commercial property as at 30 June 2013:
Commercial Property (Dr) 4 491 000
Revaluation Surplus (Cr) 4 491 000
- To record the increase in the fair value of the commercial property as at 30 June 2013.
Narrations:
1. Revaluation of commercial property as at 1 January 2013:
"To record the revaluation of the commercial property in Commissioner Street as at 1 January 2013, resulting in a Revaluation Surplus of R 2 191 400."
2. Revaluation of commercial property as at 30 June 2013:
"To record the revaluation of the commercial property in Commissioner Street as at 30 June 2013, resulting in a Revaluation Surplus of R 4 491 000."