Question

Assume Target acquires a tract of land on January 1, 2020, for $106,000 cash. On December 31, 2020, the current market value of the land is $143,000. On December 31, 2021, the current market value of the land is $120,000. The firm sells the land on December 31, 2022, for $177,000 cash. Ignoring income taxes, complete the following items.

(a) Assuming valuation of the land at acquisition cost until sale of the land (Approach 1), indicate the dollar effect of the information on net income for: 1. 2020 2. 2021, and 3. 2022.

(b) Assuming valuation of the land at current market value and including market value changes each year in net income (Approach 2), indicate the dollar effect of the information on net income for: 1. 2020 2. 2021, and 3. 2022.

(c) Assuming valuation of the land at current market value but including unrealized gains and losses in accumulated other comprehensive income until sale of the land (Approach 3), indicate the dollar effect of the information on net income for: 1. 2020 2. 2021, and 3. 2022.

Answer 1

$ effect on Net income	Approach-1	Approach -2		Approach-3
2020	0	37000	Unrealised gain, credited to income statement (Increases net income for 2020, by $ 37000)	0	Unrealised gain of $ 37000 credited to OCI, under SH. Equity ----does not affect the income statement.
2021	0	-23000	Unrealised loss, debited to income statement (decreases net income for 2021, by $ 23000)	0	Unrealised loss of $ 23000 debited to OCI, under SH. Equity, now , a net 0f 37000-23000= $ 14000 (cr.) in AOCI ----does not affect the income statement.
2022	71000	57000	Realised gain on sale , credited to income statement (Increases net income for 2022, by $ 57000)	71000	Realised gain on sale , credited to income statement (Increases net income for 2022, by $ 71000)
	Gain on sale
	177000-106000

Journal entries						Debit	Credit			Debit	Credit
a. Cost model		Debit	Credit		b.Fair value adj. thro' Income statement(I/S)	Debit	Credit		c.Fair value adj. thro' AOCI(B/S )	Debit	Credit
1-Jan-20	Land	106000			Land	106000			Land	106000
	Cash		106000		Cash		106000		Cash		106000
31-Dec-20	No JE				Fair value adjustment-Land	37000			Fair value adjustment-Land	37000
					Unrealised gain on revaluation-I/S		37000		Unrealised gain on revaluation-OCI		37000
31-Dec-21	No JE				Unrealised loss on revaluation-I/S	23000			Unrealised loss on revaluation-OCI	23000
					Fair value adjustment-Land		23000		Fair value adjustment-Land		23000
31-Dec-22	Cash	177000			Cash	177000			Cash	177000
	Land		106000		Land		106000		Acc.OCI(37000-23000)	14000
	Gain on sale of land		71000		Fair value adjustment-Land		14000		Land		106000
					Realised gain on sale of Land		57000		Fair value adjustment-Land		14000
									Realised gain on sale of Land		71000