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Chapter 11: Q4ISTQ (page 606)

Hilo Company has land that cost \(350,000 but now has a fair value of \)500,000. Hilo Company decides to use the revaluation method specified in IFRS to account for the land. Which of the following statements is correct?

  1. Hilo Company must continue to report the land at \(350,000.
  2. Hilo Company would report a net income increase of \)150,000 due to an increase in the value of the land.
  3. Hilo Company would debit Revaluation Surplus for \(150,000.
  4. Hilo Company would credit Revaluation Surplus by \)150,000.

Short Answer

Expert verified

The correct option is option (d): Hilo Company would credit Revaluation Surplus by $150,000.

Step by step solution

01

Meaning of Fair Value

According to a company's financial statement, a fair value represents the estimated value of its assets and liabilities. Fair market value refers to an item's sale value that is fair for both buyers and sellers. In other words, it is the 鈥減otential price鈥� of an asset or debt rather than its historical price or market value.

02

Explaining the correct option

The fair value of the land is $500,000, and the cost of the land is $350,000. So, the revaluation surplus would be $150,000.

Working notes:

Revalution = Fair value of land - Cost of the land

= $500,000 - $350,000

= $150,000

Thus, the correct thing for Hilo Company to do is to credit Revaluation Surplus by $150,000.

03

Explaining the incorrect options

Option (a): There is a revaluation surplus of $150,000. So, reporting land on $350,000 is a wrong appropriation by Hilo Company.

Option (b): In the accounting book of Hilo Company, there is a fair value of land, and the cost of the land is mentioned as well. So, the revaluation value should be ascertained for the accurate value of the asset.

Option (c): The fair value of the land is greater than the cost of the land, so there would be a credit revaluation surplus of $150,000.

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Most popular questions from this chapter

(Depreciation for Partial Periods鈥擲L, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine鈥檚 life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years鈥�-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset鈥檚 life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years鈥�-digits method.
  3. Double-declining-balance method

What are the major factors considered in determining what depreciation method to use?

Holt Company purchased a computer for \(8,000 on January 1, 2016. Straight-line depreciation is used, based on a 5-year life and a \)1,000 salvage value. In 2018, the estimates are revised. Holt now feels the computer will be used until December 31, 2019, when it can be sold for $500. Compute the 2018 depreciation.

(Depreciation Computations鈥擣our Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2017. The cost of this machine was \(117,900. The company estimated that the machine would have a salvage value of \)12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

  1. Straight-line depreciation for 2017.
  2. Activity method for 2017, assuming that machine usage was 800 hours.
  3. Sum-of-the-years鈥�-digits for 2018.
  4. Double-declining balance for 2018.

It has been suggested that plant and equipment could be replaced more quickly if depreciation rates for income tax and accounting purposes were substantially increased. As a result, business operations would receive the benefit of more modern and more efficient plant facilities. Discuss the merits of this proposition.
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