Revaluation

Let’s Check
Problem 1 Alena Company applied revaluation accounting to plant asset
with carrying amount of 8,000,000 on January 1, year 1, useful life of 4
years and no residual value. Depreciation is based on straight line method.
On December 31, year 1, independent appraisers determined that the
asset has a fair value of 7,500,000.
Required:
1. What is the amount to record depreciation for Year 1? 2,000,000
2. What is the amount included in the journal entry to record the revaluation
on December 31, Year 1?
3. The financial statements for Year 1 shall include balance/carrying
amount of plant asset on January 1, year 2 amounting to ___7,500,000.
4. What is included in the journal entry to record depreciation for year 2?

Cost replacement cost increase

Plant asset 8,000,000 10,000,000 2,000,000
Acc. Depn25% 2,000,000 2,500,000 500,000
C/A 75% 6,000,000 7,500,000 S/V 1,500,000

Dec. 31, YEAR 1

Plant asset 2,000,000
Acc. Depreciation 500,000
Revaluation surplus 1,500,000

Dec. 31, YEAR 2

Depreciation 2,500,000
Accumulated depreciation 2,500,000
7,500,000/3

Revaluation surplus 500,000

Retained earnings 500,000
1,500,000/3=500,000

8,000,000/4 = 2,000,000
Problem 2. On January 1, year 1, Laagan Company owned a building with
historical cost of 32,000,000 depreciated over a 40 year life on a straight
line method. Revaluation model was adopted by the entity in measuring its
property, plant and equipment. The building has already been revalued
twice with the following fair values:
January 1, Year 2 37,440,000
January 1, Year 4 44,400,000
Required:
1. What is the revaluation surplus on January 1, Year 2? 6,240,000
2. What is the increase in revaluation surplus to be recognized as
component of other comprehensive income on January 1, year 4?
1. What is the revaluation surplus to be reported in the statement of
changes on December 31, Year 4?

January 1, YEAR 1
COST R/C INCREASE
BUILDING 32,000,000 38,400,000 6,400,000
ACC. DEPN 800,000 960,000 160,000
C/A 31,200,000 37,440,000 6,240,000 R/S (1)

JAN. 1, YEAR 2
BUILDING 6,400,000
ACC. DEPRECIATION 160,000
REVALUATION SURPLUS 6,240,000

DEC. 31, YEAR 2

DEPRECIATION 960,000
ACC. DEPRECIATION 960,000
37,440,000/39=960,000

REVALUATION SURPLUS 160,000

RETAINED EARNINGS 160,000
6,240,000/39=160,000

DEC. 31, YEAR 3

DEPRECIATION 960,000
ACC. DEPRECIATION 960,000
37,440,000-960,000=36,480,000/38=960,000

REVALUATION SURPLUS 160,000

RETAINED EARNINGS 160,000
6,240,000/39=160,000
JAN. 1, YEAR 4
COST R/C INCREASE
BUILDING 38,400,000 48,000,000 9,600,000
ACC. DEPN 2,880,000 3,600,000 720,000
C/A 35,520,000 44,400,000 8,880,000 R/S (2)

BUILDING 9,600,000
ACC. DEPRECIATION 720,000
REVALUATION SURPLUS 8,880,000

DEC. 31, YEAR 4

DEPRECIATION 1,200,000
ACC. DEPRECIATION 1,200,000
44,400,000/37=1,200,000

REVALUATION SURPLUS 400,000

RETAINED EARNINGS 400,000

8,880,000/37=240,000 + 160,000 = 400,000

REVALUATION SURPLUS 6,240,000

PIECEMEAL REALIZATION
YEAR 2 160,000
YEAR 3 160,000 320,000
BALANCE 5,920,000
ADDITIONAL R/S YEAR 4 8,880,000
TOTAL 14,800,000
PIECEMEAL REALIZATION YEAR 4 400,000
BALANCE 14,400,000

Dec. 31, YEAR 5

Depreciation 1,200,000
Acc. Depreciation 1,200,000

Revaluation surplus 400,000

Retained earnings 400,000

Revaluation surplus balance at the end of year 5? 14,000,000

Cost 48,000,000
Less: accumulated depreciation 6,000,000
C/A 42,000,000

Acc. depreciation
Debit credit
800,000
 160,000
960,000
960,000
720,000
1,200,000
1,200,000
6,000,000

Let’s Analyze
This problem will be graded and will form part of your 5% assignment and 10% accumulated
class participation/recitation. Submit with solution through LMS. I will accept photo upload of
answers which are handwritten only. Late submission will be given equivalent point deduction.
Hathoria company acquired a building on January 1, year 1 at a cost of 20,000,000. The
building has an estimated useful life of 6 years and residual value of 2,000,000.
The building was revalued on January 1, year 4 and the revaluation revealed replacement cost
of 30,000,000, residual value of 4,000,000 and revised useful life of 8 years (from date of
revaluation).
a. Prepare journal entry to record the revaluation.
b. Prepare journal entry to record annual depreciation for year 4.
c. Prepare journal entry to record the piecemeal realization of the revaluation surplus.
d. Prepare the solution to support your answer.
Answer: 20,000,000-2,000,000=18,000,000/6=3,000,000*3=9,000,000

Number 1
COST REPLACEMENT COST INCREASE
20,000,000 30,000,000 10,000,000
RV (4,000,000) (4,000,000) -
16,000,000 26,000,000 10,000,000
3/6 (9,000,000) 50% 13,000,000 4,000,000
Rem. 7,000,000 50% 13,000,000 SV 6,000,000 RS

20,000,000-2,000,000=18,000,000/6=3,000,000 X 3=9,000,000
9,000,000/18,000,000 = 50%
Building 10,000,000
ACCUMULATED DEPRECIATION 4,000,000
REVALUATION SURPLUS 6,000,000

Number 2 end of year 4

Depreciation expense 1,625,000
Accumulated Depreciation 1,625,000
13,000,000/8=1,625,000

Number 3 end of year 4

Revaluation surplus 750,000
Retained earnings 750,000
6,000,000/8

What is the carrying amount of the building on Dec. 31, year 4

Cost 30,000,000
Acc. Depreciation 14,625,000
Carrying amount 15,375,000

What is the balance of revaluation surplus on December 31, year 4?

6,000,000 – 750,000 = 5,250,000

In a Nutshell
You are in conflict with your company boss named Haggorn in Khalil company as to work
related matters in presenting to the owner of the company on a certain sale of an asset which
has been revalued previously. Make a presentation to the owner that would support your stand
as to the recording of the said sale of the asset. Use the following data as your knowledge on
the said sale of the equipment. The data provided was on the date of revaluation:

Cost Replacement Cost

Equipment 6,500,000 9,200,000
Residual value 500,000 200,000
Useful life in years 12
Age of the machinery 2
Accumulated depreciation ?
The selling price of the equipment yesterday (one year after revaluation) which your conflict has
arisen is 8,000,000.
Answer 6500,000-500,000=6,000,000/12*2=1,000,000
2/12=.16666666

6,500,000 9,200,000 2,700,000

200,000 200,000 -
6,300,000 9,000,000 2,700,000
1,000,000 1,500,000 500,000
5,300,000 7,500,000 SV 2,200,000 RS

9,000,000/12*2=1,500,000
Equipment 2,700,000
ACCUMULATED DEPRECIATION 500,000
REVALUATION SURPLUS 2,200,000

After one year

Depreciation expense 750,000
Accumulated Dep. 750,000

Revaluation surplus 220,000

Retained earnings 220,000

Suggested entry when the asset is sold the day which is one year after revaluation:
Cash 8,000,000
ACCUMULATED DEPRECIATION 2,250,000
Equipment 9,200,000
Gain on sale 1,050,000

SELLING PRICE 8,000,000

C/A 9,200,000 -2,250,000 6,950,000
GAIN ON SALE 1,050,000

Revaluation surplus 1,980,000

Retained earnings 1,980,000