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Chapter 11: Q11-5IFRS (page 607)

Tanaka Company has land that cost \(15,000,000. Its fair value on December 31, 2017, is \)20,000,000. Tanaka chooses the revaluation model to report its land. Explain how the land and its related valuation should be reported.

Short Answer

Expert verified

Answer

Land should be valued at $20,000,000 on the balance sheet.

Step by step solution

01

Step-by-Step SolutionStep 1: 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 “potential price” of an asset or debt rather than its historical price or market value.

02

Explaining the reporting of land and its related valuation.

The land should be valued at $20,000,000 on the balance sheet, and an unrealized gain of $5,000,000 should be shown as other comprehensive income on the income statement.

Calculation of unrealized gain

Unrealized gain=Fair value−Cost of land=$20,000,000−$15,000,000=$5,000,000

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Most popular questions from this chapter

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?

(Depreciation for Fractional Periods) On March 10, 2019, Lost World Company sells equipment that it purchased for \(192,000 on August 20, 2012. It was originally estimated that the equipment would have a life of 12 years and a salvage value of \)16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight line method of depreciation.

Instructions

  1. (a) Compute the depreciation charge on this equipment for 2012, for 2019, and the total charge for the period from 2013 to 2018, inclusive, under each of the six following assumptions with respect to partial periods.
    1. Depreciation is computed for the exact period of time during which the asset is owned. (Use 365 days for base and record depreciation through March 9, 2019.)
    2. Depreciation is computed for the full year on the January 1 balance in the asset account.
    3. Depreciation is computed for the full year on the December 31 balance in the asset account.
    4. Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
    5. Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
    6. Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
  2. (b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.

(Depreciation for Partial Period—SL, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price

\(85,000

Credit terms

2/10, n/30

Freight-in

\) 800

Preparation and installation costs

\( 3,800

Labor costs during regular production operations

\)10,500

It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements.

Instructions

  1. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
    1. Straight-line method for 2017.
    2. Sum-of-the-years’-digits method for 2018.
    3. Double-declining-balance method for 2017.
  2. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?

(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).

Jurassic Company owns equipment that cost \(900,000 and has accumulated depreciation of \)380,000. The expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.
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