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