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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

(Depreciation—Strike, Units-of-Production, Obsolescence) The following are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation.

Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points.

1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production.

2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred.

Instructions

Comment on the appropriateness of the controller’s comments.

Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant.

Instructions

  1. Discuss the effect of projected demand in units for the new blenders (which may be steady, decreasing, or increasing) on the determination of a depreciation method for the machine.
  2. What other matters should be considered in determining the depreciation method? (Ignore income tax considerations.)

Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2017 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational.

In reviewing the depreciation rates and discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream.

Instructions

What is the proper accounting for the four sawmills at the end of 2017?

Francis Corporation purchased an asset at a cost of \(50,000 on March 1, 2017. The asset has a useful life of 8 years and a salvage value of \)4,000. For tax purposes, the MACRS class life is 5 years. Compute tax depreciation for each year 2017–2022.

(Depreciation for Partial Periods—SL, Act., SYD, and Declining-Balance) The cost of equipment purchased by Charleston, Inc., on June 1, 2017, is \(89,000. It is estimated that the machine will have a \)5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2017, the machine was operated 6,000 hours and produced 55,000 units. During 2018, the machine was operated 5,500 hours and produced 48,000 units.

Instructions Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

  1. Straight-line.
  2. Units-of-output.
  3. Working hours.
  4. Sum-of-the-years’-digits.
  5. Declining-balance (twice the straight-line rate).

(Depletion and Depreciation—Mining) Khamsah Mining Company has purchased a tract of mineral land for \(900,000. It is estimated that this tract will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It is further estimated that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a salvage value of \)30,000.

The company builds necessary structures and sheds on the site at a cost of \(36,000. It is estimated that these structures can serve 15 years but, because they must be dismantled if they are to be moved, they have no salvage value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased secondhand at a cost of \)60,000. This machinery cost the former owner $150,000 and was 50% depreciated when purchased. Khamsah Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted, but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery.

Instructions

  1. As chief accountant for the company, you are to prepare a schedule showing estimated depletion and depreciation costs for each year of the expected life of the mine.
  2. Also compute the depreciation and depletion for the first year assuming actual production of 5,000 tons. Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.

(Depletion Computations—Timber) Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2003 at a cost of \(1,300 per acre. At the time of purchase, the land was estimated to have a value of \)300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2017, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2017, Forda built 10 miles of roads at a cost of \(7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.

Instructions

  1. Determine the cost of timber sold related to depletion for 2017.
  2. If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2017.
  3. If Forda plants five seedlings at a cost of \)4 per seedling for each tree cut, how should Forda treat the reforestation?
See all solutions

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