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FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO
FAR.119—REVALUATION MODEL MAY 2021 CPALE REVIEW

LEARNING OBJECTIVES

1. To compute for the “whole” revaluation surplus

2. To compute for the “remaining” revaluation surplus
3. To compute for the new depreciation expense
4. To account for the revaluation of asset that was
previously impaired
5. To account for the impairment of asset that was
previously revalued

REVIEW NOTES

Revaluation Model – The PPE are measured subsequently
at revalued amount. This is the fair value less subsequent
depreciation and impairment. If the company used
revaluation model on an item of PPE, the entire class of PPE
to which that asset belongs shall be revalued.
Revaluation Surplus – is type of earnings that is not yet
realized that is why, these earnings are presented in the other
comprehensive income. Once realized, revaluation surplus is
transferred to retained earnings (RE) so it can now be
declared as dividends.

Cost Model VS. Revaluation Model PROCESS OF ACCOUNTING FOR REVALUATION AND
COMPUTATIONS:
1. Increase in Value of the Asset:
1. “Whole” revaluation surplus (date of revaluation):
Cost Model Revaluation Model
Without Recognize as Revalued - FV/SV/DRC (a) XX
prior Do not recognize “revaluation surplus Less: Carrying amount (b) (XX)
impairment (RS)” Whole revaluation surplus XX

With Recognize as a. Revalued amount – if the “fair value” is given, no

Recognize as
Prior
“Gain on reversal”
“Gain on reversal more computation is needed, however, if
Impairment And revaluation surplus” “replacement cost” is given, DRC is computed as
follows:

2. Decrease in Value of the Asset Replacement cost (RC) XX

Less: Acc. Dep [(RC/life) * age] (XX)
Cost Model Revaluation Model Depreciated replacement cost XX

Without Recognize as b. Carrying amount

Recognize as
prior “Impairment loss”
“Impairment loss”
revaluation
Cost XX
Less: Acc. Dep [(Cost/life) * age] (XX)
With Recognize as
Prior Not applicable “Deduction to RS and
Carrying amount XX
Revaluation Impairment loss”
2. “Remaining” revaluation surplus (subsequent to date of
revaluation):
Revalued Amount – is either:
1. Fair value or Sound Value – the price that would be Whole revaluation surplus (see above) XX
received to sell an asset. Less: Amount transferred to R.E. (a) (XX)
Remaining revaluation surplus XX
2. Depreciated Replacement Cost (DRC) – determine from
the amount that would be required currently to replace a. Amount transferred to retained earnings:
the asset (replacement cost) adjusted for any
depreciation based on the replacement cost. (For depreciable asset)

Timing of Revaluation: Whole revaluation surplus

= Annual transfer
• Volatile PPE – Annual revaluation is necessary. Remaining useful life
• Not volatile PPE – Every 3 to 5 years.
(For non-depreciable asset)
100% when the revalued asset is sold, 0% if not sold.

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FAR | FAR.119—REVALUATION ARC – ACCOUNTANCY REVIEW CENTER

Reminders: Revaluation of Previously Impaired Asset – under the cost

• Revaluation surplus should be net of tax. model the subsequent increase in value is limited only to the
• In computing the accumulated depreciation of DRC, use reversal limit, while under revaluation there is no limit as to its
the original useful life but the new residual value. increase in value.

COMPUTATION:
TWO Approaches In Recording Revaluation:
Revalued amount (FV/SV/DRC) XX
1. Proportional Approach – the principal account and Less: Carrying amount on reversal (a) (XX)
the contra-account of the PPE will be increased by Total increase XX
the percentage of increase from the revaluation. Less: Gain on reversal (b) (XX)
Revaluation surplus XX
Whole revaluation surplus
= % of increase
Carrying amount
a. Remaining Carrying Amount at Reversal:
2. Elimination Approach – the contra-account will be
reduced by the amount of revaluation.
Remaining CA date of impairment XX
Less: New depreciation (XX)
Remaining CA date of reversal XX
New Depreciation – Revaluation is a change in estimate.
When an asset is revalued, the depreciation expense for this b. Gain on Reversal
asset will change. The basis for the new depreciation is the
revalued amount (FV/SV/DRC) which will be spread out to the Reversal limit (b) XX
remaining useful life. Less: CA on reversal date (a) (XX)
Gain on reversal XX
FV/SV/DRC
= New Depreciation
Remaining useful life /THE END/

Impairment of Previously Revalued Asset – the decrease

in value is recognize as deduction to the remaining
revaluation surplus and the balance is treated as impairment
loss.

COMPUTATION:

Carrying amount on impairment (a) XX

Less: Recoverable amount (b) (XX)
Total loss XX
Less: Remaining revaluation sur. (c) (XX)
Impairment loss XX

a. Carrying amount

Carrying amount on revaluation (FV/SV/DRC) XX

Less: New depreciation (XX)
Carrying amount on impairment XX

b. Recoverable amount

Fair value less cost to sell XX

Versus: Value-in-use XX
Recoverable amount (select higher) XX

c. Whole revaluation surplus (see above) XX

Less: Amount transferred to R.E. (XX)
Remaining revaluation surplus XX

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FAR | FAR.119—REVALUATION ARC – ACCOUNTANCY REVIEW CENTER

DISCUSSION QUESTIONS

1. If an entity with a fleet of cars and ships decided to Numbers 7-8

revalue property, plant and equipment, which of the On January 1, 2021, GGG, Inc. purchased an equipment for
following statements is true? P10,400,000. Residual value was P800,000 and useful life
A. Revalue only one-half of each class of property, plant was for 10 years. On December 31, 2024, the equipment’s
replacement cost had increased to P16,000,000 while its
and equipment residual value was reduced to P400,000. GGG appraised the
B. Revalue an entire class of property, plant and equipment and the process resulted to the original life being
equipment revised to 12 years.
C. Revalue one ship at a time as it is easier than
revaluing all ships together 7. How much is the revaluation surplus recognized on
D. Since assets are being revalued regularly, there is no December 31, 2024?
need to depreciate A. 3,200,000 C. 3,360,000
B. 5,200,000 D. 9,360,000
2. Which statement is true about the revaluation model for
property, plant and equipment? 8. How much is the 2025 depreciation?
A. The frequency of revaluation depends upon the A. 780,000 C. 1,040,000
changes in fair value of the property, plant and B. 960,000 D. 1,170,000
equipment.
B. Property, plant and equipment with significant and
9. On January 1, 2023, Stigman Company purchased
volatile changes in fair value necessitate annual
building at a cost of P10,000,000 with a 10-year useful
revaluation.
life and no residual value. The entity used the straight-line
C. Property, plant and equipment with insignificant
depreciation method.
changes in fair value may be revalued only every
three to five years.
On January 1, 2025, the entity decided to use revaluation
D. All of these statements are true about the revaluation model and it was determined that the fair value of the
model. equipment on this date is P12,000,000. The income tax
rate is 30%.
Numbers 3-5
On January 1, 2023, Dower Company purchased equipment What is included in the entry to record the revaluation on
costing P2,400,000 with a 6-year useful life and no residual January 1, 2025?
value. Dower entity used the straight-line method of A. Debit accumulated depreciation P1,000,000
depreciation. On December 31, 2023, the fair value of the B. Debit deferred tax liability P1,200,000
equipment was P2,200,000. Dower used the revaluation C. Credit revaluation surplus P5,000,000
model and Dower revalued the equipment on December 31,
D. Credit revaluation surplus P2,800,000
2023. The entity restated its accumulated depreciation
proportionately.
Numbers 10-11
3. What is the pretax revaluation surplus on December 31, Cornish Company finished construction of building on
January 1, 2018 at a total cost of P25,000,000. The building
2023?
was depreciated over the estimated useful life of 20 years
A. 200,000 C. 166,667 using the straight-line method with no residual value.
B. 160,000 D. 566,667
The building was subsequently revalued on December 31,
4. What is included in the journal entry to record the 2021 and the revaluation report showed that the asset had a
revaluation on December 31, 2023? replacement cost of P32,000,000 and was determined to
A. Debit equipment P200,000 have no change in the useful life.
B. Debit depreciation expense P566,667
C. Credit accumulated depreciation P40,000
D. Credit revaluation surplus P240,000 On January 1, 2023, the building was tested for impairment
and the fair value was P18,000,000 on same date, with no
5. What is the pretax revaluation surplus on December 31, change on the remaining useful life.
2024?
10. What amount of revaluation surplus should be
A. 240,000 C. 453,333
recognized on December 31, 2021?
B. 200,000 D. 160,000
A. 5,600,000 C. 1,400,000
B. 7,000,000 D. 5,250,000
6. What is the revalued amount of property plant and
equipment?
11. What is the impairment loss for 2023?
A. Fair value
A. 6,000,000 C. 750,000
B. Depreciated replacement cost
B. 400,000 D. 0
C. Replacement cost
D. Fair value and depreciated replacement cost

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FAR | FAR.119—REVALUATION ARC – ACCOUNTANCY REVIEW CENTER

Numbers 12-13
Bernadette, Inc. purchased an equipment on January 1, 2019
for P13,000,000. This equipment had 10-year useful life. On
December 31, 2020, due to obsolescence, Bernadette
recognized an impairment loss of P2,600,000.
On December 31, 2021, Bernadette determined that the fair
value of the equipment had increased to P9,750,000.
12. What amount of gain on reversal of impairment shall
Bernadette recognize in 2021?
A. 2,925,000 C. 650,000
B. 2,275,000 D. 325,000
14. When a balance is carried in an “revaluation surplus”
account in relation to an asset that has been
derecognized, it is applicable under PAS 16 to
A. Transfer the balance to “share capital” account.
B. Transfer the balance to retained earnings.
C. Recognize the balance in profit or loss of the period
in which the asset was derecognized.
D. Transfer the balance to a provision account for future
asset revaluations.

13. Assuming Bernadette was using revaluation model in

accounting for its property, plant and equipment, how
much was the revaluation surplus resulting from the
revaluation in 2021?
A. 2,250,000 C. 650,000
B. 2,275,000 D. 325,000 / END /

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FAR | FAR.119—REVALUATION ARC – ACCOUNTANCY REVIEW CENTER

PRACTICE EXAM – PROBLEMS

Numbers 1-2 Numbers 6-7
On January 1, 2020, Coleen Company showed land with On January 1, 2017, Boston Company purchased a new
carrying amount of 10,000,000 and building with cost of building at a cost of P6,000,000. Depreciation was computed
P60,000,000 and accumulated depreciation of P18,000,000. on the straight-line basis at 4% per year. On January 1, 2022,
The land and building were revalued on same date and the building had a fair value of P8,000,000.
revealed for fair value of land at P15,000,000 and the building
at P70,000,000. The original useful life of the building is 20 6. Using the revaluation model in accounting the new
years and depreciation is computed on the straight line. The building, what is the depreciation for 2022?
income tax rate is 30%. A. 320,000 C. 100,000
B. 400,000 D. 240,000
1. What is the revaluation surplus on December 31, 2020?
A. 33,000,000 C. 21,450,000
7. What is the pretax revaluation surplus on December 31,
B. 23,100,000 D. 21,700,000
2022?
2. What is the annual depreciation for 2020? A. 3,072,000 C. 3,040,000
A. 5,000,000 C. 4,500,000 B. 1,900,000 D. 1,920,000
B. 3,500,000 D. 3,000,000
Numbers 8-10
Numbers 3-4 On June 30, 2023, Flakes reported the following information:
Daralyn company acquired a building on January 1, 2017 at
a cost of P20,000,000. The building had a useful life of 6 years Equipment at cost 30,000,000
and residual value of P2,000,000. The building was revalued Accumulated depreciation 10,500,000
on January 1,2020 and the revaluation revealed replacement
cost of P30,000,000, residual value of P4,000,000 and The equipment was measured using the cost model and
revised useful life of 8 years from the date of acquisition. The depreciated on a straight line basis over 10-year period. On
tax rate is 30%. Dec. 31, 2023, the management decided to change the basis
of measurement from the cost model to the revaluation
3. What is the revaluation surplus on December 31, 2020? model. The equipment was revalued at the fair value of
A. 6,000,000 C. 2,800,000 P27,000,000 with no change in useful life. The income tax
B. 4,200,000 D. 3,360,000 rate is 30%.

8. What is the revaluation surplus on December 31, 2024?

4. What is the annual depreciation for 2020?
A. 6,300,000 C. 5,250,000
A. 2,600,000 C. 3,000,000
B. 9,000,000 D. 5,670,000
B. 3,400,000 D. 1,400,000
9. What is the depreciation for 2024?
5. During the current year, Sunrise Company sold a piece
A. 4,500,000 C. 3,000,000
of equipment used in production. The equipment had
B. 2,700,000 D. 1,500,000
been accounted for using the revaluation model and
details of the account on the date of sale are as follows:
10. What is deferred tax liability on December 31, 2024?
A. 2,700,000 C. 1,350,000
Sale price 5,000,000
Carrying amount of equipment 4,500,000 B. 2,250,000 D. 2,500,000
Revaluation surplus balance 1,000,000

Which statement is correct about recording the sale?

A. The gain that should be recorded in profit or loss is
P1,500,000.
B. The gain that should be recorded in other
comprehensive income is P500,000.
C. The gain that should be recorded in other
comprehensive income is P1,500,000.
D. The gain that should be recorded in profit and loss is
P500,000 and the P1,000,000 revaluation surplus
should be transferred to retained earnings.
/ End /

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