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REVALUATION

1. The document discusses methods for revaluing fixed assets, including cost, replacement cost, and fair value methods. 2. Examples are provided to illustrate revaluation entries using the proportional and elimination methods. This includes adjusting the asset, depreciation, and deferred tax accounts. 3. Piecemeal adjustments are also shown to close the revaluation surplus to retained earnings over time.

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176 views10 pages

REVALUATION

1. The document discusses methods for revaluing fixed assets, including cost, replacement cost, and fair value methods. 2. Examples are provided to illustrate revaluation entries using the proportional and elimination methods. This includes adjusting the asset, depreciation, and deferred tax accounts. 3. Piecemeal adjustments are also shown to close the revaluation surplus to retained earnings over time.

Uploaded by

James Ryan Alzona
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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REVALUATION

Cost - Cost Method (Cost – Depreciation – Impairment)


- Revaluation (Market Price Based)
- PROPORTIONATE METHOD OF COMPUTING
REVALUATION
PROBLEM 29-1 (USING REPLACEMENT COST)

Cost Replacement Adjustment


Machinery 4,500,000 7,200,000 2,700,000
Accumulated Depreciation/
Observed Depreciation .20 900,000 1,440,000 540,000
Book Value/Sound Value/
Revaluation Surplus 3,600,000 5,760,000 2,160,000
The tax rate is 30%.
At the Date of Machinery 2,700,000
Revaluation Accumulated Depreciation 540,000
(Proportional) Revaluation Surplus 1,512,000
(2,160,000 x .70)
Deferred Tax Liability 648,000
(2,160,000 x .30)
At the Date of Accumulated Depreciation 900,000
Revaluation Machinery (5,760,000 – 4,500,000) 1,260,000
1,512,000
(Elimination) Revaluation Surplus
648,000
Deferred Tax Liability
Depreciation Depreciation 480,000
Entry after Accumulated Depreciation 480,000
Revaluation

Piecemeal Revaluation Surplus (180,000 x .70) 126,000


Adjustment Deferred Tax Liability (180,000 x .30) 54,000
126,000
Retained Earnings
54,000
Income Tax Liability
Depreciation after Revaluation
Depreciation = Sound Value / Remaining Life
= 5,760,000 / (15-3)
= 480,000
1. Depreciable Cost / Annual Depreciation
= 4,500,000 / (900,000 / 3)
= 4,500,000 / 300,000
= 15 years (Life of the Asset)

Piecemeal Adjustment
Depreciation at Cost (3,600,000 / 12) = 300,000
Depreciation on Revaluation (2,160,000 / 12) = 180,000
Depreciation = 480,000

We will close out Depreciation on Revaluation to Retained


Earnings, net of tax.
PROBLEM 29-2 (REPLACEMENT)

Cost Replacement Adjustment


Machinery 3,000,000 4,800,000 1,800,000
Accumulated Depreciation/
Observed Depreciation .25 750,000 1,200,000 450,000
Book Value/Sound Value/
Revaluation Surplus 2,250,000 3,600,000 1,350,000
The tax rate is 30%.
At the Date of Machinery 1,800,000
Revaluation Accumulated Depreciation 450,000
Revaluation Surplus 945,000
(1,350,000 x .70)
405,000
Deferred Tax Liability
(1,350,000 x .30)

Depreciation Depreciation 240,000


Entry after Accumulated Depreciation 240,000
Revaluation

Piecemeal Revaluation Surplus (90,000 x .70) 63,000


Adjustment Deferred Tax Liability (90,000 x .30) 27,000
63,000
Retained Earnings
27,000
Income Tax Liability
Depreciation after Revaluation
Depreciation = Sound Value / Remaining Life
= 3,600,000 / (20-5)
= 240,000
1. Depreciable Cost / Annual Depreciation
= 3,000,000 / (750,000 / 5)
= 3,000,000 / 150,000
= 20 years (Life of the Asset)

Piecemeal Adjustment
Depreciation at Cost (2,250,000 / 15) = 150,000
Depreciation on Revaluation (1,350,000 / 15) = 90,000
Depreciation = 240,000
We will close out Depreciation on Revaluation to Retained
Earnings, net of tax.

Problem 29 – 2 (REPLACEMENT / USING ELIMINATION


METHOD)

Cost Replacement Adjustment


Machinery 3,000,000 4,800,000 1,800,000
Accumulated Depreciation/
Observed Depreciation .25 750,000 1,200,000 450,000
Book Value/Sound Value/
Revaluation Surplus 2,250,000 3,600,000 1,350,000
The tax rate is 30%.
At the Date Machinery 600,000
of Accumulated Depreciation 750,000
Revaluation Revaluation Surplus 945,000
(1,350,000 x .70)
Deferred Tax Liability 405,000
(1,350,000 x .30)

Depreciation Depreciation 240,000


Entry after Accumulated Depreciation 240,000
Revaluation

Piecemeal Revaluation Surplus (90,000 x .70) 63,000


Adjustment Deferred Tax Liability (90,000 x .30) 27,000
63,000
Retained Earnings
27,000
Income Tax Liability
Depreciation after Revaluation
Depreciation = Sound Value / Remaining Life
= 3,600,000 / (20-5)
= 240,000
1. Depreciable Cost / Annual Depreciation
= 3,000,000 / (750,000 / 5)
= 3,000,000 / 150,000
= 20 years (Life of the Asset)

Piecemeal Adjustment
Depreciation at Cost (2,250,000 / 15) = 150,000
Depreciation on Revaluation (1,350,000 / 15) = 90,000
Depreciation = 240,000

We will close out Depreciation on Revaluation to Retained


Earnings, net of tax.

29- 3 ( PROPORTIONAL / USING THE FAIR VALUE)


Cost Fair Value Adjustment
Building 1.0 5,000,000 8,000,000 3,000,000
(6M / .75)
Accumulated Depreciation/ 2,000,000 750,000
Observed Depreciation .25 1,250,000 (8M x .25)
Book Value/Sound Value/
Revaluation Surplus .75 3,750,000 6,000,000 2,250,000
The tax rate is 30%.
At the Date Machinery 3,000,000
of Accumulated Depreciation 750,000
Revaluation Revaluation Surplus 1,575,000
(2,250,000 x .70) 675,000
Deferred Tax Liability
(2,250,000 x .30)

Depreciation Depreciation 200,000


Entry after Accumulated Depreciation 200,000
Revaluation (6M / (40-10) =

Piecemeal Revaluation Surplus (2,250,000 / 30


Adjustment x .70) 52,500
Deferred Tax Liability (2,250,000 / 30 22,500
x .30) 52,500
Retained Earnings 22,500
Income Tax Liability

Percentage of age / life = 10/40 = 25%

29-4 (CHANGE IN RESIDUAL VALUE)


Cost Replacement Adjustment
Cost
Building 6,500,000 9,200,000 2,700,000
Residual Value 200,000 200,000
Depreciable Cost 6,300,000 9,000,000
Accumulated 16.67% 1,000,000 1,500,000 500,000
Depreciation/ Observed 1M/ (6.5M (9M x .166666)
Depreciation
(6.5M-.5M - .5M)/12 x 2
)
Book Value/Sound Value/
Revaluation Surplus 5,300,000 7,500,000 2,200,000

At the Date Building 2,700,000


of Accumulated Depreciation 500,000
Revaluation Revaluation Surplus 2,200,000
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Using Problem 29 – 4 , if there is a change in life, subsequent


depreciation is computed (Sound Value / Remaining Life)

If the life of the asset from the date acquisition was changed
from 12 years to 8 years.

Depreciation Depreciation 1,250,000


Entry after Accumulated Depreciation 1,250,000
Revaluation (7.5M / (8-2) =

Piecemeal Revaluation Surplus 366,667


Adjustment Retained Earnings 366,667
(2.2M / 6)

29-4 (REVERSAL ON REVALUATION)


USE THE SITUATION IN THE PROBLEM BUT IN
ADDITIONAL ASSUMPTIONS:
IF AFTER 5 YEARS FROM REVALUATION, THE FAIR VALUE OF
EQUIPMENT IS P 2,500,000

Cost Replacement Adjustment


Cost
Building 6,500,000 9,200,000 2,700,000
Residual Value 200,000 200,000
Depreciable Cost 6,300,000 9,000,000
Accumulated 16.67% 1,000,000 1,500,000 500,000
Depreciation/ Observed 1M/ (6.5M (9M x .166666)
Depreciation
(6.5M-.5M - .5M)/12 x 2
)
Book Value/Sound Value/
Revaluation Surplus 5,300,000 7,500,000 2,200,000

At the Date Building 2,700,000


of Accumulated Depreciation 500,000
Revaluation Revaluation Surplus 2,200,000

Y1
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Y2
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Y3
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Y4
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Y5
Depreciation Depreciation 750,000
Entry after Accumulated Depreciation 750,000
Revaluation (7.5M / (12-2) =

Piecemeal Revaluation Surplus 220,000


Adjustment Retained Earnings 220,000
(2.2M / 10)

Values After 5 years


Cost Accumulated Revaluation
Depreciation Surplus
Before 6,500,000 1,000,000
Revaluation 2,700,000 500,000 2,200,000
Balance 9,200,000 1,500,000 2,200,000
Adj. – Y1 750,000 (220,000)
Adj. – Y2 750,000 (220,000)
Adj. – Y3 750,000 (220,000)
Adj. – Y4 750,000 (220,000)
Adj. – Y5 750,000 (220,000)
Balance 9,200,000 5,250,000 1,100,000

Book Value Fair Value Decrease


Cost 9,200,000 6,200,000 3,000,000
Salvage 200,000 200,000
Depreciable 9,000,000 6,000,000
Acc. Depr. .58333333
5,250,000 3,500,000 (5.25M/ 9M)
Book Value 3,750,000 2,500,000 1,250,000 .4166666

Adjusting Revaluation 1,100,000


Entry: Surplus
Revaluation
loss ( 1.25M 150,000
– 1.1M)
Accumulated 1,750,000
Depreciation
(5.25M – 3,000,000
3.5M)
Building
(9.2M –
6.2M)
Y6 Entry Depreciation 500,000
Expense
(2.5M / 5)
500,000
Accumulated
Depreciation

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