Revaluation model – problem

Illustration 1

An equipment acquired January 1, 2012, at a cost of P2,000,000 was expected to have

a useful life of 10 years. On December 31, 2014 was expected to have a fair value of
P1,750,000. The company carries this asset in a class that measured using revaluation
model.

On December 31, 2016, the asset was appraised at fair value of P900,000. On January
1, 2019 the asset was sold for P550,000. Assume that the company follows the
policy of transferring some of the surplus as the asset is being used.

Required: Necessary journal entries

a. Proportional method
b. Elimination method

Answer:

Proportional method

1/1/12 Equipment 2,000,000

Cash 2,000,000

Annual depreciation (2M / 10 years) 200,000

12/31/12 Depreciation expense 200,000

Accumulated depreciation 200,000

12/31/13 Depreciation expense 200,000

Accumulated depreciation 200,000

12/31/14 Depreciation expense 200,000

Accumulated depreciation 200,000

Cost Appraisal Increase/ decrease

Gross 2,000,000 **2,500,000 ***500,000
Accumulated 600,000 750,000 150,000
depreciation
Net 1,400,000 1,750,000 *350,000

*1,750,000 – 1,400,000 = 350,000

350,000/1,400,000 = 25%

**2M x 125% = 2,500,000

***2M x 25% = 500,000

12/31/24 Equipment 500,000

Accumulated depreciation 150,000
Revaluation surplus 350,000

Annual depreciation (1,750,000 / 7 years) 250,000

12/31/15 Depreciation expense 250,000

Accumulated depreciation 250,000

12/31/15 Revaluation surplus 50,000

Retained earnings 50,000
 (350,000 / 7 years)
12/31/16 Depreciation expense 250,000
Accumulated depreciation 250,000

12/31/16 Revaluation surplus 50,000

Retained earnings 50,000
(350,000 /7 years)

Appraisal CV Appraisal Increase/ decrease

Gross 2,500,000 1,800,000 ***700,000
Accumulated *1,250,000 900,000 350,000
depreciation
Net 1,250,000 900,000 **350,000

*600,000 + 150,000 + 500,000 = 1,250,000

** 900,000 – 1,250,000 = 350,000

350,000 /1,250,000 = 28%

*** 2.5M x 28% = 700,000

Revaluation surplus – 12/31/14 350,000

2015 (50,000)
2016 (50,000)
Revaluation surplus – 12/31/16 250,000

Net decrease in the value of equipment 350,000

Balance revaluation surplus 250,000
Impairment loss (Revaluation loss) 100,000

12/31/16 Accumulated depreciation 350,000

Revaluation surplus 250,000
Impairment loss (revaluation loss) 100,000
Equipment 700,000

Annual depreciation (900,000 / 5 years) 180,000

12/31/17 Depreciation expense 180,000

Accumulated depreciation 180,000

12/31/18 Depreciation expense 180,000

Accumulated depreciation 180,000

Equipment 1,800,000
Accumulated depreciation
(900,000 + 180,000 +180,000) 1,260,000
Carrying value 540,000

1/1/19 cash 550,000

Accumulated depreciation 1,260,000
Equipment 1,800,000
Gain on sale 10,000

Elimination method

1/1/12 Equipment 2,000,000

Cash 2,000,000

Annual depreciation (2M / 10 years) 200,000

12/31/12 Depreciation expense 200,000

 Accumulated depreciation 200,000

12/31/13 Depreciation expense 200,000

Accumulated depreciation 200,000

12/31/14 Depreciation expense 200,000

Accumulated depreciation 200,000

Cost Appraisal Increase/ decrease

Gross 2,000,000 1,750,000 250,000
Accumulated 600,000 - 600,000
depreciation
Net 1,400,000 1,750,000 350,000

12/31/14 Accumulated depreciation 600,000

Equipment 250,000
Revaluation surplus 350,000

Annual depreciation (1,750,000 /7 years) 250,000

12/31/15 Depreciation expense 250,000

Accumulated depreciation 250,000

12/31/15 Revaluation surplus 50,000

Retained earnings 50,000
(350,000 / 7 years)

12/31/16 Depreciation expense 250,000

Accumulated depreciation 250,000

12/31/16 Revaluation surplus 50,000

Retained earnings 50,000
(350,000 /7 years)

Appraisal CV Appraisal Increase/ decrease

Gross 1,750,000 900,000 850,000
Accumulated 500,000 - 500,000
depreciation
Net 1,250,000 900,000 350,000

12/31/16 Accumulated depreciation 500,000

Impairment loss/revaluation loss 100,000
Revaluation surplus 250,000
Equipment 850,000

Annual depreciation (900,000 / 5 years) 180,000

12/31/17 Depreciation expense 180,000

Accumulated depreciation 180,000

12/31/18 Depreciation expense 180,000

Accumulated depreciation 180,000

Equipment 900,000
Accumulated depreciation
(180,000 + 180,000) 360,000
Carrying value 540,000

1/1/19 Cash 550,000

Accumulated depreciation 360,000
Equipment 900,000
 Gain on sale 10,000

Illustration 2

An equipment acquired January 1, 2012, at a cost of P2,000,000 was expected to have

a useful life of 10 years. On December 31, 2014 was expected to have a fair value of
P1,750,000. The company carries this asset in a class that measured using revaluation
model.

On December 31, 2016, the asset was appraised at fair value of P900,000. On January
1, 2019 the asset was sold for P550,000. Assume that the company follows the
policy of transferring the whole surplus when the asset is retired or disposed of.
Assume further, that accumulated depreciation is restated proportionately upon
revaluation.

Required: Necessary journal entries

Answer:

Proportional method

1/1/12 Equipment 2,000,000

Cash 2,000,000

Annual depreciation (2M / 10 years) 200,000

12/31/12 Depreciation expense 200,000

Accumulated depreciation 200,000

12/31/13 Depreciation expense 200,000

Accumulated depreciation 200,000

12/31/14 Depreciation expense 200,000

Accumulated depreciation 200,000

Cost Appraisal Increase/ decrease

Gross 2,000,000 **2,500,000 ***500,000
Accumulated 600,000 750,000 150,000
depreciation
Net 1,400,000 1,750,000 *350,000

*1,750,000 – 1,400,000 = 350,000

350,000/1,400,000 = 25%

**2M x 125% = 2,500,000

***2M x 25% = 500,000

12/31/24 Equipment 500,000

Accumulated depreciation 150,000
Revaluation surplus 350,000

Annual depreciation (1,750,000 / 7 years) 250,000

12/31/15 Depreciation expense 250,000

Accumulated depreciation 250,000

12/31/16 Depreciation expense 250,000

Accumulated depreciation 250,000
 Appraisal CV Appraisal Increase/ decrease
Gross 2,500,000 1,800,000 ***700,000
Accumulated *1,250,000 900,000 350,000
depreciation
Net 1,250,000 900,000 **350,000

*600,000 + 150,000 + 500,000 = 1,250,000

** 900,000 – 1,250,000 = 350,000

350,000 /1,250,000 = 28%

*** 2.5M x 28% = 700,000

12/31/16 Accumulated depreciation 350,000

Revaluation surplus 350,000
Impairment loss (revaluation loss) 100,000
Retained earnings *100,000
Equipment 700,000

*the credit to the retained earnings account is for the amount of revaluation surplus that
has not been transferred to the retained earnings during the year 2015 and 2016.
350,000/7 years = 50,000 x 2 = 100,000

Annual depreciation (900,000 / 5 years) 180,000

12/31/17 Depreciation expense 180,000

Accumulated depreciation 180,000

12/31/18 Depreciation expense 180,000

Accumulated depreciation 180,000

Equipment 1,800,000
Accumulated depreciation
(900,000 + 180,000 +180,000) 1,260,000
Carrying value 540,000

1/1/19 Cash 550,000

Accumulated depreciation 1,260,000
Equipment 1,800,000
Gain on sale 10,000

Problem A

On January 1, 2020, Valenzuela Company purchased a new building at a cost of

P4,000,000. Depreciation was computed on the straight-line basis at 4% per year.

On January 1, 2025, the building had a fair value of P6,000,000.

1. What amount should be recorded as depreciation for 2025?

2. What amount should be reported as pretax revaluation surplus on December 31,

2025?

3. What is the carrying amount of building December 31, 2025?

Problem B

On April 1, 2024, Caloocan Company reported the following information:

Equipment at cost 5,000,000

Accumulated depreciation 1,500,000

The equipment was measured using the cost model and depreciated on straight-line
basis over a 10-year period.

On December 31, 2024, the management decided to change the basis of measuring the
equipment from the cost model to the revaluation model.
The equipment had a fair value of P3,550,000 with remaining useful life of 5 years on
December 31, 2024.

4. What amount should be reported as pretax revaluation surplus on December 31,

2024?

5. What amount should be recorded as depreciation of the equipment for 2025?

6. What amount should be reported as pretax revaluation surplus on December 31,

2025?

7. What amount is the carrying amount of equipment December 31, 2025?

Problem C

On December 31, 2024, Manila Company provided the following account balance
relating to property, plant and equipment:

Land 3,000,000
Building 15,000,000
Accumulated depreciation – Bldg. 3,000,000
Machinery 3,000,000
Accumulated depreciation – Machinery 1,200,000

Asset have been carried at cost since their acquisition. all assets were acquired on
January 1, 2015. The straight-line method is used.

On January 1, 2025, the entity revalued the property, plant and equipment. On such
date, competent appraiser submitted the following:

Replacement cost
Land 5,000,000
Building 25,000,000
Machinery 5,000,000

8. What amount should be reported as pretax revaluation surplus on January 1,

2025?

9. What amount should be recorded as depreciation for 2025?

10. What amount should be reported as pretax revaluation surplus on December 31,
2025?

11. What is the carrying amount of land, building and machinery December 31,
2025?

Problem D

On January 1, 2025, Navotas Company owned a machinery costing P5,400,000 with

residual value of P400,000. The useful life of the asset is 10 years and was depreciated
using the straight-line method.

On such date , the machinery had a replacement cost of P8,000,000 with residual value
of P200,000. The age of the asset is 5 years. The appraisal of the machinery showed a
total revised useful life of 15 years and the entity decided to carry the machinery at
revalued amount.

12. What is the accumulated depreciation before revaluation on January 1, 2025?

13. What amount should be reported a pretax revaluation surplus on January 1,

2025?

14. What amount should be recorded as annual depreciation subsequent to

revaluation?
15. What amount should be reported a pretax revaluation surplus on December 31,
2025?

Problem E

On January 1, 2025 Meycuayan Company reported the following information:

Building at cost 30,000,000

Accumulated depreciation 9,000,000

The building was measured using cost model and depreciated on a straight-line basis
over 10 period.

January 1, 2025, the management decided to change the basis of measurement from
the cost model to the revaluation model.

The equipment was revalued at the fair value of P27,000,000 with no change in useful
life. The income tax rate is 25%.

16. What amount should be reported as revaluation surplus on January 1, 2025?

17. What amount should be reported as revaluation surplus on December 31, 2025?

18. What amount should be reported as deferred tax liability on December 31, 2025?

19. What amount be recorded as depreciation for 2025?

20. What is the carrying amount on December 31, 2025?

Problem F

On January 1, 2016, Marilao Company purchased a machinery incurring a total cost of

P3,600,000. This unit of equipment belongs to a class carried by Marilao using the
revaluation model. Any resulting revaluation surplus is periodically transferred to
retained earnings as the surplus is periodically transferred to retained earnings as the
surplus is realized. Revaluation is recorded maintaining the proportionate relationship
between the asset account and accumulated depreciation.

Depreciation is consistently provided on the equipment based on the original estimated

useful life of 10 years. The company revalues this unit every two years. The results of
the revaluation are as follows:

Date of revaluation Revalued amount (fair value)

December 31, 2017 3,120,000
December 31, 2019 2,010,000
December 31, 2021 1,800,000

21. What amount should be reported a pretax revaluation surplus (loss) on January
1, 2018?

22. What amount should be recorded as depreciation on year December 31, 2018?
23. What amount should be reported a pretax revaluation surplus (loss) on
December 31, 2019?

24. What amount should be reported a pretax revaluation surplus (loss) on

December 31, 2021?

25. What amount should be recorded as depreciation on year December 31, 2022?

26. What amount should be reported a pretax revaluation surplus (loss) on

December 31, 2022?