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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 “potential price” 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

(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?

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

If Remmers, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost \(50,000 and have been used for 10 years are sold for \)14,000?

(Depreciation Computations—Four 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’-digits for 2018.
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(Depreciation Computation—Replacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for \(31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was \)200, and \(500 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of \)2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of \(1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2019, the company buys a new machine of greater capacity for \)35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of \(20,000. To prepare the old machine for removal from the plant cost \)75, and expenditures to install the new one were \(1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of \)4,000 at the end of that time. (The exchange has commercial substance.)

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)
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