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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

Explain how gains or losses on impaired assets should be reported in income.

(Depreciation鈥擱eplacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of \(2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2018, a new roof was installed at a cost of \)300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.

Instructions

  1. What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
  2. What entry should be made in 2018 to record the replacement of the roof?
  3. Prepare the entry in January 2018 to record the revision in the estimated life of the building if necessary.
  4. What amount of depreciation should be charged for the year 2018?

(Depreciation Computations鈥擣ive Methods) Jon Seceda Furnace Corp. purchased machinery for \(315,000 on May 1, 2017. It is estimated that it will have a useful life of 10 years, salvage value of \)15,000, production of 240,000 units, and working hours of 25,000. During 2018, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.

Instructions

From the information given, compute the depreciation charge for 2018 under each of the following methods. (Round to the nearest dollar.)

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. 厂耻尘-辞蹿-迟丑别-测别补谤蝉鈥�-诲颈驳颈迟蝉.
  5. Declining-balance (use 20% as the annual rate)

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

\(18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

\)94,000

The Accumulated Depreciation鈥擳rucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of \(30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was \)40,000. Ichiro. paid the automobile dealer \(22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, \)22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for \(3,500 cash; entry debited Cash and credited Trucks, \)3,500.

July 1, 2017 A new truck (No. 6) was acquired for \(42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for \)700 cash. Ichiro received \(2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, \)3,200, and credits to Miscellaneous Income, \(700, and Trucks, \)2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, \(21,000; 2016, \)22,500; 2017, \(25,050; and 2018, \)30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company鈥檚 errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.

Distinguish among depreciation, depletion, and amortization.
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