Stratosphere Company acquires its only building on January 1, Year 1, at a cost of $4,000,000. The building has a 20-year life, zero residual value, and is depreciated on a straight-line basis. The company adopts the revaluation model in accounting for buildings. On December 31, Year 2, the fair value of the building is $3,780,000. The company eliminates accumulated depreciation against the building account at the time of revaluation. The company's accounting policy is to reverse a portion of the revaluation surplus account related to increased depreciation expense. On January 2, Year 4, the company sells the building for $3,500,000.
Required:
Determine the amounts to be reflected in the balance sheet related to this building for Years 1-4 in the following table. (Use parentheses to indicate credit amounts.)
SOLUTION
Amounts in parentheses represent credits.
| Date | Cost | Accumulated depreciation | Carrying Amount | Revaluation Surplus | Income | Retained Earnings |
|---|---|---|---|---|---|---|
| January 1, Year 1 | 4,000,000 | 4,000,000 | ||||
| December 31, Year 1 | 4,000,000 | (200,000) | 3,800,000 | 200,000 | 200,000 | |
| December 31, Year 2 | 4,000,000 | (200,000) | 3,600,000 | 200,000 | 200,000 | |
| December 31, Year 2 | (220,000) | 400,000 | 180,000 | (180,000) | ||
| Balance | 3,780,000 | 0 | 3,780,000 | (180,000) | 400,000 | |
| December 31, Year 3 | 3,780,000 | (210,000)* | 3,570,000 | 10,000 | 210,000 | 200,000 |
| Balance | 3,780,000 | (210,000) | 3,570,000 | (170,000) | 600,000 | |
| Sale, Jan 2, Year 4 | (3,780,000) | 210,000 | (3,570,000) | 170,000 | 70,000 | (100,000) |
| Balance | $ – | $ – | $ – | $ – | 70,000 | 500,000 |
* Calculated as $3,780,000 divided by remaining life of 18 years.
The net impact on retained earnings over the life of the equipment is negative $500,000 (debit), which is the difference between the purchase price of $4,000,000 and the selling price of $3,500,000.
Journal entries to account for the building under the revaluation model
January 1, Year 1
Building 4,000,000
Cash 4,000,000
December 31, Year 1
Depreciation expense 200,000
Accumulated depreciation 200,000
December 31, Year 2
Depreciation expense 200,000
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