Question

XYZ Company purchased a land for $ 1,000,000 during 2017 and chooses the revaluation model in accounting for its land.  

Below are the following information:

Date	Fair Value
December 31, 2017	$ 1,120,000
December 31, 2018	$ 870,000
December 31, 2019	$ 1,110,000

A. If the land was sold on January 10, 2020, for $ 1,115,000, how much is the gain on sale of land? ____

B. How much is the accumulated other comprehensive income to be recycled to the retained earnings as a result of the gain on sale of land? ____

Answer 1

A.

The revaluation model gives a business the option of carrying a fixed asset at its revalued amount. Subsequent to the revaluation, the amount carried on the books is the asset's fair value, less subsequent accumulated depreciation and accumulated impairment losses. Under this approach, one must continue to revalue fixed assets at sufficiently regular intervals to ensure that the carrying amount does not differ materially from the fair value in any period.

If the election is made to use the revaluation model and a revaluation results in an increase in the carrying amount of a fixed asset, recognize the increase in other comprehensive income, and accumulate it in equity in an account entitled “revaluation surplus.” However, if the increase reverses a revaluation decrease for the same asset that had been previously recognized in profit or loss, recognize the revaluation gain in profit or loss to the extent of the previous loss (thereby erasing the loss).

If a revaluation results in a decrease in the carrying amount of a fixed asset, recognize the decrease in profit or loss. However, if there is a credit balance in the revaluation surplus for that asset, recognize the decrease in other comprehensive income to offset the credit balance. The decrease recognized in other comprehensive income decreases the amount of any revaluation surplus already recorded in equity.

Effect of revaluation on December 31, 2017 - Increse in the value of land.

Debit Land by 20,000 and credit revaluation surplus by 20,000

Effect of revaluation on December 31, 2018 - Decrease in the value of land.

Debit revaluation surplus by 20,000, debit loss on land revaluation 230,000 and credit land by 250,000

Effect of revaluation on December 31, 2019 - Increase in the value of land.

Debit Land by 240,000 and credit revaluation surplus by 240,000

Gain on sale of land = $5,000. (Sales Price - Book value) (1,115,000 - 1,110,000)

B.

How much is the accumulated other comprehensive income to be recycled to the retained earnings as a result of the gain on sale of land.

Accumulated other comprehensive income = Revaluation surplus Credit on December 31, 2017 - Revaluation surplus debit on December 31, 2018 + Revaluation surplus Credit on December 31, 2019

= 20,000 - 20,000 + 240,000

= $240,000