Financial Accounting - Effect of Revaluation Method on the Comprehensive Income - Example

Name: Course: Institution: Lecturer: Date: Financial accounting a) Journal entries The company uses the cost method in accounting for impairment of land, this involves comparing the greater value between the cost of disposal and the value in use and the greater value between the two is compared with the market (fair value). As Kopp & Smith (2013) point out, if the value of the market value of land is higher than the greater value between the cost of disposal and the value in use then an impairment loss on land is recognized. According to Clapp & Salavei (2010), dand is not depreciated since it has indefinite use and thus and be impaired depending on the years the company expects it to remain useful. Thus, in Hawks ltd land also has a useful life of 4year and no scrap value at the end of the year thus accumulated impairment is accounted for using the straight line method. The journal entries for impairment on land for Hawks ltd are shown below; Accumulated impairment on land = (value-scrap value)/useful life = $1,500,000/4 = $ 375,000 Hawks Ltd General journal entries for land From 1 July 2011 to 30 June 2014 Hawks Ltd General journal entries for land     Dr Cr 7/1/2011 land $1,500,000     Bank   $1,500,000   To record purchase of land             30/6/2012 Impairment expense $375,000     Accumulated Impairment   $375,000   To record Impairment expense of land for the year             30/6/2012 Land $1,250,000     Capital   $1,250,000   To record the fair value of the land             30/6/2012 Impairment loss $50,000     Accumulated impairment loss   $50,000   To record impairment loss on land             30/6/2013 Impairment expense $375,000     Accumulated Impairment   $375,000   To record land Impairment expense for the year             30/6/2013 land $1,200,000     Capital   $1,200,000 To record the fair value of land         30/6/2013 Impairment loss Nil     Accumulated impairment loss   Nil   To record impairment loss of land             30/6/2014 Impairment expense $375,000     Accumulated Impairment   $375,000   To record Impairment expense for the year on land             30/6/2014 land $1,400,000     Capital   $1,400,000   To record the fair value of land             30/6/2014 Impairment loss No impairment     Accumulated impairment loss   No impairment   To record impairment on land             Journal entries for machinery have been prepared based on revaluation method; this allows the amount of accumulated depreciation to be accounted for against cost of machinery so that the carrying amount is established which is then compared with the market value to establish is the machinery will realize a revaluation gain or surplus (Sedláček 2010). The accumulated depreciation is accounted for using the straight line method. The journal entries are as recorded below; Depreciation on machinery= (value-scrap value)/useful life = $ 1,000,000/4 = $ 275,000 Hawks Ltd General journal entries for machinery From 1 July 2011 to 30 June 2014 Hawks Ltd General journal entries for machinery     Dr Cr 7/1/2011 Machinery $ 1,000,000     Bank   $ 1,000,000   To record purchase of machinery             30/6/2012 Depreciation expense $ 250,000     Accumulated depreciation   $ 250,000   To record depreciation expense of the machinery for the year             30/6/2012 Machinery $ 1,100,000     Capital   $ 1,100,000   To record the value of the machinery             30/6/2012 Machinery $ 100,000     Revaluation surplus   $ 100,000   To record gain in value of the machinery             30/6/2013 Depreciation expense $ 275,000     Accumulated depreciation   $ 275,000   To record depreciation expense for the year             30/6/2013 Machinery $ 700,000     Capital   $ 700,000         30/6/2013 Revaluation reserve $ 125,000     Machinery   $ 125,000   To record loss of value of the machinery             30/62014 Depreciation expense $ 275,000     Accumulated depreciation   $ 275,000   To record depreciation expense for the year             30/6/2014 Machinery $ 300,000     Capital   $ 300,000   To record the value of the machinery at end year             30/6/2014 Revaluation reserve $ 125,000     Machinery   $ 125,000   To record loss of value of the machinery                     b) Effect of revaluation method on the comprehensive income The company is using revaluation method to account for its machinery; this enables them to recognize assets and depreciation amounts charged on them. When revaluation of the machinery is carried out there is an increase in income accounted for in the comprehensive income. This is because the gain realized from revaluation will be accounted for in preparation of the comprehensive income statement which will increase it. The revaluation gain realized in comparing the carrying amount with the revaluation amount is recorded as other income in the comprehensive income statement which results in increase in income in the statement. This will affect the profit or loss realized in the company. The revaluation surplus realized in 30th June 2012 will be recorded in the other comprehensive income in the company’s statement of comprehensive income (Bamber et al 2010). b) Possible reasons for impairment of land There is impairment loss accounted for on land this can be attributed to changes in market value of land so that the fair value of land is higher than the value in use on the cost of disposal which may be caused by inflation or effects of macroeconomic factors on economic stability and performance. The impairment realized on land can also be due to damage on land so that its value is reduced. Some of the things that may result in damage of land so that it is impaired are land degradation, natural calamities or pollution so that the value of land is increased compared to its cost of disposal or its value in use. The inputs used on land may also have resulted in diminishing returns or reduction in value of land so that impairment is realized on the land since its cost of disposal is low as compared to its fair value (Exchange & Rates 2012). References Bamber, L, S, Jiang, J, Petroni, K, R, & Wang, I, Y, 2010, comprehensive income: who's afraid of performance reporting, The Accounting Review, Vol.85,Iss.(1), Pp97-126. Clapp, J, M, & Salavei, K, 2010, hedonic pricing with redevelopment options: a new approach to estimating depreciation effects, Journal of Urban Economics, Vol.67,Iss.(3), Pp362-377. Exchange, A, S, & Rates, M, M, 2012, Market Update, Change, Vol.5, Pp0-03. Kopp, R, J, & Smith, V, K, 2013,valuing natural assets: the economics of natural resource damage assessment, Routledge. Sedláček, J, 2010, the methods of valuation in agricultural accounting, Agricultural Economics–Czech, Vol.56, Pp59-66. Read More