Question

Cheyenne Ltd. purchased a building on January 1, 2018 for $14,880,000. Cheyenne accounted for this asset using the revaluation model and revalued the building every two years. The building was estimated to have a useful life of 30 years with no residual value, and Cheyenne used straight-line depreciation. On December 31, 2019, the building had a fair value of $14,084,000. On December 31, 2021, the building had a fair value of $12,788,200.

Prepare the journal entries on the books of Cheyenne Ltd. to revalue the building on December 31, 2019 and December 31, 2021 using the asset adjustment method. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answer to 0 decimal places, e.g. 5,275. Record entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2019Dec. 31, 2021
	(To adjust depreciation on building.)
	(To adjust building.)
Dec. 31, 2019Dec. 31, 2021
	(To adjust depreciation on building.)
	(To adjust building.)

Answer 1

Ans: The building has a useful life of 30 years and the company uses straight line depreciation.

Hence, yearly depreciation = $14,880,000 / 30 = $496,000.

Accounting entries on the books on Dec. 31, 2019:

The carrying amount on books on Dec.31, 2019 will be = $14,880,000 - 2(496,000) = $13,880,000 & the fair value on that date is $14,084,000, therefore an upward adjustment of $196,000 is required to building account.

Journal Entry:

Building 196,000

Revaluation Surplus 196,000

Accounting entries on the books on Dec. 31, 2021:

The new carrying amount of building as on Dec.31, 2019 will be $14,084,000 and remaining useful life is 28 years, so yearly depreciation will be = $14,084,000 / 28 = $503,000.

So, the carrying amount on books on Dec.31, 2021 will be = $14,084,000 - 2(503,000) = $13,078,000 & the fair value on that date is $12,788,200.

Here, the carrying amount exceeds the fair value by $289,800 and the balance in Revaluation Surplus account is $196,000. Therefore, this overvalued amount will be adjusted from Revaluation Surplus account and rest amount will be impairment loss which shall go to income statement.

Journal Entry:

Revaluation Surplus 196,000

Impairment Loss 93,800

Building 196,000

Accumulated Impairment Loss 93,800