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Chapter 11: 13IFRS (page 609)

Falcetto Company acquired equipment on January 1, 2016, for \(12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year period. The appraised value of the equipment approximates the carrying amount at December 31, 2016 and 2018. On December 31, 2017, the fair value of the equipment is determined to be \)7,000.

Instructions

  1. Prepare the journal entries for 2016 related to the equipment.
  2. Prepare the journal entries for 2017 related to the equipment.

Determine the amount of depreciation expense that Falcetto will record on the equipment in 2018.

Short Answer

Expert verified
  1. Depreciation expense is $2,000.
  2. The equipment value is $5,000.
  3. Depreciation expense is $1,750.

Step by step solution

01

Meaning of Revaluation

Revaluation funds are set up on a balance sheet to preserve a contingency account linked to other assets. Upon reevaluation, if the carrying value of the asset changes, a line item will be created.

02

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 1, 2016

Equipment

12,000

Cash

12,000

Dec. 31, 2016

Depreciation Expense

2,000

Accumulated Depreciation

Equipment

2,000

03

(b) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2017

Depreciation Expense

2,000

Accumulated Depreciation

Equipment

2,000

Dec. 31, 2017

Accumulated Depreciation-Equipment

4,000

Loss on Impairment

1,000

Equipment

5,000

Working notes:

Calculation of the value of the equipment:

Equipment = Cost of equipment - Fair Value

= $12,000 - $7,000

=$5,000

04

(c) Calculating depreciation expense for 2018         

The depreciation expense of equipment for 2018 is $1,750.

Working notes:

Calculation of depreciation expense:

Depreciation expense = Costofasset-SalvagevalueUsefullife

= $12,000-$5,0004

= $1,750

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Most popular questions from this chapter

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

(Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1, 2017, for \(31,000. The computer equipment has a useful life of 10 years and a salvage value of \)1,000. For tax purposes, the MACRS class life is 5 years.

Instructions

a. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in

  1. the financial statements for 2017 and
  2. the tax return for 2017?

c. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?

Why might a company choose not to use revaluation accounting?

Question: (Comprehensive Depreciation Computations) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 595. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company鈥檚 records and personnel.

  1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
  2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid \(800,000 for the land and building together. At the time of acquisition, the land had an appraised value of \)90,000, and the building had an appraised value of \(810,000.
  3. Land B was acquired on October 2, 2016, in exchange for 2,500 newly issued shares of Kohlbeck鈥檚 common stock. At the date of acquisition, the stock had a par value of \)5 per share and a fair value of \(30 per share. During October 2016, Kohlbeck paid \)16,000 to demolish an existing building on this land so it could construct a new building.
  4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Kohlbeck had paid \(320,000 of the estimated total construction costs of \)450,000. It is estimated that the building will be completed and occupied by July 2019.
  5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at \(40,000 and the salvage value at \)3,000.
  6. Machinery A鈥檚 total cost of \(182,900 includes installation expense of \)600 and normal repairs and maintenance of \(14,900. Salvage value is estimated at \)6,000. Machinery A was sold on February 1, 2018.
  7. On October 1, 2017, Machinery B was acquired with a down payment of \(5,740 and the remaining payments to be made in 11 annual installments of \)6,000 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).
    Present Value of \(1.00 at 8%

    10 years

    .463

    11 years

    .429

    15 years

    .315

Present Value of an Ordinary Annuity of \)1.00 at 8%

10 years

6.710

11 years

7.139

15 years

8.559

KOHLBECK CORPORATION

Fixed-Asset and Depreciation Schedule

For Fiscal Years Ended September 30, 2017, and September 30, 2018

Depreciation

Expense year

ended

September 30

Assets

Acquisition

Date

Cost

Salvage

Deprecation

method

Estimated

Life in

years

2017

2018

Land A

October 1, 2016

\( (1)

N/A*

N/A

N/A

N/A

N/A

Building A

October 1, 2016

(2)

\)40,000

Straight-line

(3)

\(13,600

(4)

Land B

October 2, 2016

(5)

N/A

N/A

N/A

N/A

N/A

Building B

Under construction

\)320,000 to date

鈥�

Straight-line

30

鈥�

(6)

Donated Equipment

October 2, 2016

(7)

3,000

150% declining-balance

10

(8)

(9)

Machinery A

October 2, 2016

(10)

6,000

Sum-of-the-years-digits

8

(11)

(12)

Machinery B

October 1, 2017

(13)

鈥�

Straight-line

20

鈥�

(14)

Instructions

For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest dollar.)

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the double-declining-balance method. (b) Compute 2017 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2017.
See all solutions

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