Question

Maple Inc. owns equipment that it purchased on January 1, 2018 for $4 Million.

The following additional information is available:

Depreciation: 10-year useful life, straight line basis, no residual.

Dec 31, 2018 – Book value (after recording 2018 depreciation): $3,600,000

Dec 31, 2018 – Fair value: $4,500,000  

Dec 31, 2019 – Fair value $3,000,000

The company uses the revaluation model (asset adjustment method) to account for its property, plant and equipment.

Instructions

Assuming the entry for the current year's depreciation has already been recorded, prepare the entr(ies) at:

1. Dec 31, 2018
2. Dec 31, 2019

Answer 1

Dec 31, 2018

Book value (after recording 2018 depreciation) = $3,600,000

Fair value = $4,500,000

The fairvalue of the equipment is higher than the book value of the equipment as on dec 31 ,2018. This means there needs to be an upward adjustment. The gain of $900,000 (ie. $4,500,000 - $3,600,000) is an abnormal gain and is credited under shareholders equity as Revaluation surplus.

Journal:-

Equipment $900,000

Revaluation Surplus $900,000

Dec 31, 2019

New opening book value (Depreciable value) = $4,500,000

Remaining useful life = 9 years

Salvage value = Nil

Depreciation for 2019 = ($4,500,000 - Nil) / 9 years = $500,000

New Book value after depreciation = $4,500,000 - $500,000 = $4,000,000

Fairvalue = $3,000,000

The fairvalue of the equipment is lower than the book value of the equipment as on dec 31 ,2019. This means there needs to be an downward adjustment. The loss of $1,000,000 (ie. $4,000,000 - $3,000,000) should first be be written off against revaluation surplus and balance as impairment loss.

Revaluation Surplus $900,000

Impairment Loss $100,000

Building $900,000

Accumulated Impairment loss $100,000