Question

Please solve it in Excel if possible with explanations.

Thanks.

P10-11

Camco Manufacturers Inc., a publicly listed company, has two machines that are accounted for under the revaluation model. Technology in Camco's industry is fast-changing, causing the fair value of each machine to change significantly approximately every two years. The following information is available:

	Machine #1	Machine #2
Acquisition date	Jan. 2, 2014	June 30, 2013
Original cost	$440,000	$540,000
Original estimate of useful life	8 years	12 years
Original estimate of residual value	-0-	-0-
Pattern of depreciation	Straight-line	Straight-line
Fair value at Dec. 31, 2015	310,000	440,000
Balance in Machinery account after proportionate method revaluation on Dec. 31, 2015	413,333	555,789
Balance in Accumulated Depreciation account after proportionate method revaluation on Dec. 31, 2015	103,333	115,789
Cumulative balance in (Revaluation Gain or Loss)/Revaluation Surplus (OCI) at Jan. 1, 2017	(20,000)	12,500
Fair value at Dec. 31, 2017	230,000	328,000

Both machines were last revalued on December 31, 2015. Camco has a December 31 year end.

Instructions (a)   Prepare the journal entries required for 2017, using the asset adjustment method. (b)   Prepare the journal entries required for 2017, using the proportionate method. (c)   Prepare a continuity schedule showing for each machine the amounts recorded to the Machine account and to the Accumulated Depreciation account, as well as indicating the carrying amount for each fiscal year from date of purchase to December 31, 2017, using (1) the asset adjustment method and (2) the proportionate method. Show the carrying amount under each method at the end of each fiscal year. (d)   Comment on the effects on the 2017 statement of comprehensive income with respect to parts (a) and (b). (e)   Comment on the effects on the December 31, 2017 statement of financial position with respect to parts (a) and (b). (f)   Would a potential investor prefer Camco to use the asset adjustment method or the proportionate method to apply the revaluation model?

Answer 1

a.

Asset Adjustment Method

December 31, 2020 Machine #1 Depreciation Expense1...................................	51,667
Accumulated Depreciation – Machinery (Machine #1)..................		51,667
1$310,000 ÷ 6remaining years To record depreciation expense (Machine #1)
Accumulated Depreciation – Machinery (Machine #1)...............................................	103,333
Machinery (Machine #1)2......................		103,333

2$51,667 X 2 years

To eliminate accumulated depreciation (Machine #1)

The Machinery (Machine #1) account balance is now $310,000 - $103,333 = $206,667, and the related Accumulated Depreciation account is zero.

Machinery (Machine #1).................................	23,333
Revaluation Gain or Loss3....................		20,000
Revaluation Surplus (OCI)....................		3,333

To adjust the Machinery (Machine #1) account to fair value

3Recognized in income (up to the extent of revaluation loss previously recognized in income for the same asset). [Refer to part b. to see calculations]

The Machinery (Machine #1) account balance is now $206,667 + $23,333 = $230,000

Machine #2 Depreciation Expense4...................................	46,316
Accumulated Depreciation – Machinery (Machine #2)..................		46,316
4$440,000 ÷ 9.5 years

To record depreciation expense (Machine #1)

Accumulated Depreciation – Machinery (Machine #2)5.............................................	92,632
Machinery (Machine #2).......................		92,632

5$46,316 X 2 years

To eliminate accumulated depreciation (Machine #2)

The Machinery (Machine #2) account is now $440,000 - $92,632 = $347,368, and the related Accumulated Depreciation account is zero.

Revaluation Surplus (OCI)6............................	12,500
Revaluation Gain or Loss ..............................	6,868
Machinery (Machine #2).......................		19,368

To adjust the Machinery (Machine #2) account to fair value

6Recognized in OCI (up to the extent of revaluation surplus previously recognized in OCI for the same asset). [Refer to part b. to see calculations]

The Machinery (Machine #2) account is now $347,368- $19,368 = $328,000

b.

Proportionate Method

December 31, 2020 Machine #1 Depreciation Expense7.......................................	51,667
Accumulated Depreciation – Machinery (Machine #1)..........................................		51,667
7$310,000 ÷ 6 years

To record depreciation expense (Machine #1)

	Before revaluation (A)		Proportional after revaluation (B)	(B) – (A)
Machine #1	$413,333	x 230/206.666	$460,000	$46,667
Accumulated depreciation	206,6678	x 230/206.666	230,000	23,333
Carrying amount	$206,666	x 230/206.666	$230,000	$23,334

8[$103,333+ ($51,667 X 2)]*adjustedfor rounding

Machinery (Machine #1).................................	46,667
Revaluation Gain or Loss.....................		20,000
Revaluation Surplus (OCI)....................		3,334
Accumulated Depreciation – Machinery (Machine #1) .................		23,333

To adjust the Machinery (Machine #1) account to fair value

Machine #2 Depreciation Expense9.......................................	46,316
Accumulated Depreciation – Machinery (Machine #2)..........................................		46,316
9$440,000 ÷ 9.5 years

To record depreciation expense (Machine #2)

	Before revaluation (A)		X 328,000 / 347,368		Proportional after revaluation (B)	(B) – (A)
Machine #2	$555,789				$524,800	$(30,989)
Accumulated depreciation	208,42110				196,800	(11,621)
Carrying amount	$347,368				$328,000	$(19,368)

10$115,789 + $46,316 X 2

Accumulated Depreciation – Machinery (Machine #2)...............................................	11,621
Revaluation Surplus (OCI).............................	12,500
Revaluation Gain or Loss ..............................	6,868
Machinery (Machine #2) ......................		30,989

To adjust the Machinery (Machine #2) account to fair value

d.

The effects on the 2020 statement of comprehensive income are the same under both the asset adjustment method and the proportionate method. Revaluation of machine #1 results in a Revaluation Gain of $20,000, and a Revaluation Surplus (OCI) of $3,333. Revaluation of machine #2 results in a decrease in Revaluation Surplus (AOCI) from $12,500 to zero, and a Revaluation Loss of $6,868.

e.

The effects on the December 31, 2020 statement of financial position are different under each method. Under the asset adjustment method, for each machine, the Machinery asset account balance represents the fair value of the machine as at December 31, 2020, and the Accumulated Depreciation – Machinery account balance is zero. Under the proportionate method, for each machine, the Machinery asset account balance and the Accumulated Depreciation – Machinery account balance are proportionately adjusted to reflect the new carrying amount, which is equal to the fair value of the machine as at December 31, 2020.

f.

A potential investor would likely prefer that Camco use the proportionate method to apply the revaluation method, because the proportionate method provides additional useful and relevant information. Presenting an adjusted balance in the accumulated depreciation account provides information about the relative age of the asset, and allows the potential investor to assess when assets may need to be replaced. Presenting a zero balance in the accumulated depreciation account, as under the asset adjustment method, does not give this type of information.