Question

In: Accounting

Easy Company bought a piece of equipment four years ago. At December 31, 2020, the company...

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:

  1. Determine the depreciation expense for 2020.
  2. Record the journal entry adjustment for the revaluation, using the ‘asset adjustment’method.
  3. Determine the depreciation expense for 2021.
  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.

Solutions

Expert Solution

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]

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