In: Accounting
Easy Company bought a piece of equipment four years ago. At December 31, 2020, the company revalued the equipment to its fair value. The following information relates to the equipment
Original cost: $1,200; Residual value: $ 200; Estimated useful life from purchase date: 10 years; Years used to December 31, 2020: 4 years; Fair value at December 31, 2020: $966; Depreciation method is straight-line.
Required:
GIven, Original cost = $1,200, Residual Value = $200, estimated life = 10
1) Determine the depreciation expense for 2020.
Depreciation before revaluation = (Cost - Salvage value) / Useful life
= ($1,200 - $200) / 10
= $1,000 /10
Depreciation before revaluation for 2020 = $100
2) Record the journal entry adjustment for the revaluation, using the ‘asset adjustment’method.
Depreciation for 4 years = $100 * 4 = $400
Book value at the end of 4 years = $1,200 - $400 = $800
The Book value at the time of revaluation of assets is $800 but it is revalued at the fair value to $966. The difference of $166 ($966 - $800) is transfered to revaluation surplus account. So, the Adjusting Journal entry for the revaluation of the asset is as follows.
Journal Entries | Debit | Credit | |
Equipment A/c ....Dr | $166 | ||
Revaluation Surplus A/c..Cr | $166 | ||
[To record Revaluation surplus] |
3) Determine the depreciation expense for 2021
The revalued value of the asset at fair value = $ 966
Useful life = 10 years - 4 years = 6 years
Depreciation after revaluation = (Revalued value - Salvage value) / Remaining Useful life
= ($966 - $200) / 6
= $766 / 6
Depreciation after revaluation = $127.67 = $128(rounded off to the nearest dollar)
4) Assume that the fair value at the end of 2022 is $468. Record the journal entry for depreciation first for 2022, and then the entry related to this new fair value for 2022.
Journal Entries | Debit | Credit |
Depreciation expense | $128 | |
Equipment A/c | $128 | |
[To record Depreciation expense] |
Note: The depreciation expense will be the same as calculated abover for 2021
The Book value at the end of 2022 = $966 - ($128 *2)
= $966 - $26
The Book value at the end of 2022 = $710
The Book value at the end of the year 2022 is $710 but it revalued to the lower value of $468. There is a difference of $242 ($710 - $468) which is the revaluation loss. There is a balance of $166 in the Revaluation surplus. The difference in excess of revaluation surplus is $76 which is to be transfered to the Impairment losses A/c
Journal Entries | Debit | Credit |
Revaluation surplus | $166 | |
Impairment Losses | $76 | |
Building | $166 | |
Accumulated Impairment Losses | $76 | |
[To record revaluation loss] |