Intermediate Financial Accounting

Intermediate Financial Accounting

Answer no.1 )
On 1st July a machine was acquired for $ 170000.
The useful life of machine is estimated at 5 years.
The residual or scrap value after 5years= $ 20000.
Calculation of depreciation amount
1st year = 170000-20000/5
= $30000
The carrying amount that is the value which is to be carried in the balance sheet after 1st year
Cost of the machine 170000
Less: scrap value 20000
Less: amount of deprecation 30000
Therefore the carrying amount $140000
The fair value of the asset on 30th June 2016 = 120000
Therefore it can be seen that the carrying amount is less than the fair value of the assets so
140000-120000 = 20000 will be shown as a downward revaluation.
Journal entry
For depreciation
Accumulated depreciation account DR $30000
To Machinery account CR $30000

For loss on revaluation
Profit and loss account DR $20000
To Machinery Account CR $20000
2nd year
Carrying amount of machinery
Cost of machine 120000
Less: Accumulated depreciation 30000
Carrying amount of Asset $90000
At the end of 2nd year, the fair value is determined at 110000
The difference between the fair value and the carrying amount is $20000. This difference is
upward revolution.
Journal entry at the end of second year in case of depreciation
Accumulated depreciation A/c DR 30000
To Machinery A/c CR 30000

Journal entry for Fair value gain of $20000.
Machinery A/c DR 20000
To Profit and loss A/c CR 20000
The loss of $20000 has been adjusted against the loss of previous year which was transferred
to Profit &loss statement.
The fair value on 30th June 2018 is 88000
The carrying amount at the third year-end is calculated as follows:
Cost of the asset will be the fair value of previous year 110000
Less: depreciation (accumulated) 30000
Carrying amount to be capitalized 80000
The difference after comparing the fair value and carrying value comes to 8000. This 8000 is
upward revaluation.
Journal entry
For Depreciation
Accumulated depreciation A/c DR 30000
To Machinery A/c CR 30000
Journal entry for upward revaluation
Machinery Account A/c DR 8000