Under the revaluation model, Herd Ltd. can choose to revalue the machine to its fair value at the end of each reporting period. In this case, the fair value of the machine changed during the year, so the company needs to revalue the machine and make the necessary accounting entries.

On 1 July 2023, Herd Ltd. acquired the machine for $230,000 and recorded the following journal entry:

Dr. Machinery $230,000 Cr Bank $230,000

On 31 August 2023, the fair value of the machine increased to $250,000, so the company needs to revalue the machine:

Dr. Machinery revaluation surplus $10,000 Cr Machinery $10,000

The revaluation surplus is a separate equity account that records the increase in the value of the asset. The revaluation surplus can be distributed to shareholders in the form of dividends, but it cannot be used to offset any losses on other assets.

For tax purposes, the company needs to adjust the tax base of the machine to reflect the new value. The tax base is the original cost of the asset less any accumulated tax depreciation. Since the machine has no residual value, the tax base of the asset is now $207,500 (i.e. $230,000 – $22,500 tax depreciation at 10%).

Dr Deferred tax liability $1,875 Cr Income tax expense $1,875

The deferred tax liability is a liability account that records the future tax consequences of temporary differences between the carrying amount of an asset or liability and its tax base.

On 30 June 2024, the fair value of the machine decreased to $230,000, so the company needs to revalue the machine:

Dr. Machinery $20,000 Cr Machinery revaluation surplus $20,000

The decrease in the value of the asset is recorded directly in the revaluation surplus account.

For tax purposes, the company needs to adjust the tax base of the machine to reflect the new value. The tax base of the asset is now $172,500 (i.e. $207,500 – $35,000 tax depreciation at 10%).

Dr. Deferred tax asset $4,125 Cr Income tax expense $4,125

The deferred tax asset is an asset account that records the future tax consequences of temporary differences between the carrying amount of an asset or liability and its tax base.

In conclusion, the relevant journal entries from the date of acquisition to 30 June 2024, including tax effects, are:

1 July 2023:

Dr. Machinery $230,000 Cr Bank $230,000

31 August 2023:

Dr. Machinery revaluation surplus $10,000 Cr Machinery $10,000 Dr. Deferred tax liability $1,875 Cr Income tax expense $1,875

30 June 2024:

Dr. Machinery $20,000 Cr Machinery revaluation surplus $20,000 Dr. Deferred tax asset $4,125 Cr Income tax expense $4,125

References:

Australian Accounting Standards Board. (2015). AASB 116 Property, Plant, and Equipment. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPoct14_01-14.pdf

Australian Accounting Standards Board. (2004). AASB 112 Income Taxes. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB112_7-04_COMPoct14_01-15.pdf