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Q11-6IFRS

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 607

Short Answer

Why might a company choose not to use revaluation accounting?

Answer

The expense involved in revaluing a fixed asset is the primary reason why companies do not use revaluation accounting.

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Meaning of Revaluation

Revaluation funds are set up on the balance sheet to preserve a contingency account linked to other assets. Upon re-evaluation, if the carrying value of the asset changes, a line item will be created.

Step 2: Explaining the reason for a company not to choose revaluation accounting.

There are considerable and ongoing expenditures associated with assessments to determine fair value. This is the primary reason why most organizations do not utilize revaluation accounting.

Net income is also affected by the losses associated with revaluation below historical cost. Depreciation increases and results in higher expenses and reduced income when revaluation increases.

Most popular questions for Business-studies Textbooks

(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015

Truck No. 1 purchased Jan. 1, 2012, cost

$18,000

Truck No. 2 purchased July 1, 2012, cost

22,000

Truck No. 3 purchased Jan. 1, 2014, cost

30,000

Truck No. 4 purchased July 1, 2014, cost

24,000

Balance, Jan. 1, 2015

$94,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of $30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was $40,000. Ichiro. paid the automobile dealer $22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, $22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for $3,500 cash; entry debited Cash and credited Trucks, $3,500.

July 1, 2017 A new truck (No. 6) was acquired for $42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for $700 cash. Ichiro received $2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $3,200, and credits to Miscellaneous Income, $700, and Trucks, $2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, $21,000; 2016, $22,500; 2017, $25,050; and 2018, $30,400.

Instructions

  1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
  2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.
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