ACCT3010

Intermediate Accounting I
Professor Amy Zang

Chapters 11
11-1
 PREVIEW OF CHAPTER 11

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
11-2
 LEARNING OBJECTIVE 1
Depreciation—A Method Describe depreciation
concepts and methods of
of Cost Allocation depreciation.

Depreciation is the accounting process of allocating the cost

of tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use of
the asset.

Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense

 Intangibles = Amortization expense

 Mineral resources = Depletion expense

11-3 LO 1
 Depreciation—Method of Cost Allocation

Factors Involved in the Depreciation Process

Three basic questions:
1. What depreciable base is to be used?
2. What is the asset’s useful life?
3. What method of cost apportionment is best?

11-4 LO 1
 Factors Involved in Depreciation Process

Depreciable Base for the Asset

ILLUSTRATION 11.1
Computation of Depreciation Base

11-5 LO 1
 Factors Involved in Depreciation Process

Estimation of Service Lives

 Service life often differs from physical life.
 Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of physical
life).

2. Economic factors (inadequacy, supersession, and

obsolescence).

11-6 LO 1
 Depreciation—Method of Cost Allocation

Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:

1. Activity method (units of use or production).

2. Straight-line method.

3. Diminishing (accelerated)-charge methods:

a. Sum-of-the-years’-digits.

b. Declining-balance method.

11-7 LO 1
 Methods of Depreciation

Activity Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:

ILLUSTRATION 11.3
Depreciation Calculation,
Activity Method—Crane
Example

11-8 LO 1
 Methods of Depreciation

Straight-Line Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11.4
Depreciation Calculation,
Straight-Line Method—
Crane Example

11-9 LO 1
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Sum-of-the-Years’-Digits. Each fraction uses the sum of the years

as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator is the
number of years of estimated life remaining as of the beginning of
the year.

Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
11-10 LO 1
 Methods of Depreciation

Sum-of-the-Years’-Digits

ILLUSTRATION 11.6
Sum-of-the-Years’-Digits Depreciation Schedule—Crane Example

11-11 LO 1
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Declining-Balance Method.
 Utilizes a depreciation rate (percentage) that is some multiple
of the straight-line method.

 Does not deduct the salvage value in computing the

depreciation base.

11-12 LO 1
 Methods of Depreciation

Declining-Balance Method

ILLUSTRATION 11.7
Double-Declining Depreciation Schedule—Crane Example

11-13 LO 1
 LEARNING OBJECTIVE 2
Other Depreciation Issues Identify other depreciation
issues.

Component Depreciation
IFRS requires that each part of an item of property, plant,
and equipment that is significant to the total cost of the
asset must be depreciated separately.

11-14 LO 2
 Component Depreciation

Illustration: EuroAsia Airlines purchases an airplane for

€100,000,000 on January 1, 2020. The airplane has a useful life of
20 years and a residual value of €0. EuroAsia uses the straight-
line method of depreciation for all its airplanes. EuroAsia identifies
the following components, amounts, and useful lives.

ILLUSTRATION 11.8
Airplane Components

11-15 LO 2
 Component Depreciation

Computation of depreciation expense for

EuroAsia for 2020. ILLUSTRATION 11.9
Computation of
Component Depreciation

Depreciation journal entry for 2020.

Depreciation Expense 8,600,000
Accumulated Depreciation—Equipment 8,600,000

11-16 LO 2
 Component Depreciation

On the statement of financial position at the end of 2020,

EuroAsia reports the airplane as a single amount.

ILLUSTRATION 11.10
Presentation of Carrying Amount of Airplane

11-17 LO 2
 Other Depreciation Issues

Depreciation and Partial Periods

How should companies compute depreciation for partial
periods?

 Companies determine the depreciation expense for the full

year and then

 prorate this depreciation expense between the two periods

involved.

This process should continue throughout the useful life of the

asset.

11-18 LO 2
 Depreciation and Partial Periods

Illustration—(Four Methods): Maserati SpA purchased a new machine

for its assembly process on August 1, 2019. The cost of this machine
was €150,000. The company estimated that the machine would have
a salvage value of €24,000 at the end of its service life. Its life is
estimated at 5 years and its working hours are estimated at 21,000
hours. Year-end is December 31.

Instructions: Compute the depreciation expense under the following

methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.

11-19 LO 2
 Depreciation and Partial Periods

Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2019 € 126,000 / 5 = $ 25,200 x 5/12 = € 10,500 $ 10,500
2020 126,000 / 5 = 25,200 25,200 35,700
2021 126,000 / 5 = 25,200 25,200 60,900
2022 126,000 / 5 = 25,200 25,200 86,100
2023 126,000 / 5 = 25,200 25,200 111,300
2024 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
€ 126,000
Journal entry:

2019 Depreciation expense 10,500

Accumultated depreciation 10,500

11-20 LO 2
 Depreciation and Partial Periods

Activity Method (Assume 800 hours used in 2019)

(€126,000 / 21,000 hours = €6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2019 800 x $6 = € 4,800 € 4,800 € 4,800
2020 x =
2021 x =
2022 x =
2023 x =
800 € 4,800

Journal entry:
2019 Depreciation expense 4,800
Accumultated depreciation 4,800

11-21 LO 2
 Depreciation and Partial Periods
5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.

2019 € 126,000 x 5/15 = 42,000 x 5/12 € 17,500 € 17,500

2020 126,000 x 4.58/15 = 38,500 38,500 56,000

2021 126,000 x 3.58/15 = 30,100 30,100 86,100

2022 126,000 x 2.58/15 = 21,700 21,700 107,800

2023 126,000 x 1.58/15 = 13,300 13,300 121,100

2024 126,000 x .58/15 = 4,900 4,900 126,000

€ 126,000
Journal entry:
2019 Depreciation expense 17,500
Accumultated depreciation 17,500
11-22 LO 2
 Depreciation and Partial Periods

Double-Declining Balance Method

Current
BV Rate Annual Partial Year
Year Beg.Bal. per Year Expense Year Expense

2019 € 150,000 x 40% = € 60,000 x 5/12 = € 25,000

2020 125,000 x 40% = 50,000 50,000

2021 75,000 x 40% = 30,000 30,000

2022 45,000 x 40% = 18,000 18,000

2023 27,000 x 40% = 10,800 Plug 3,000

€ 126,000
Journal entry:
2019 Depreciation expense 25,000
Accumultated depreciation 25,000
11-23 LO 2
 Other Depreciation Issues

Depreciation and Replacement of PP&E

Does depreciation provide for the replacement of assets?

 Does not involve a current cash outflow.

 Funds for the replacement of the assets come from the

revenues (generated through use of the asset).

11-24 LO 2
 Other Depreciation Issues

Revision of Depreciation Rates

How should companies handle revisions in depreciation
rates?

 Accounted for in the current and prospective periods

 Not handled retrospectively

 Not considered errors or extraordinary items

11-25 LO 2
 Revision of Depreciation Rates

Arcadia HS, purchased equipment for $510,000 which was

estimated to have a useful life of 10 years with a residual value
of $10,000 at the end of that time. Depreciation has been
recorded for 7 years on a straight-line basis. In 2019 (year 8), it
is determined that the total estimated life should be 15 years
with a residual value of $5,000 at the end of that time.

Questions:
 What is the journal entry to correct No Entry
the prior years’ depreciation? Required

 Calculate the depreciation expense

for 2019.
11-26 LO 2
 After 7
Revision of Depreciation Rates years

Equipment cost $510,000 First, establish NBV

Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2018)

Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

11-27 LO 2
 After 7
Revision of Depreciation Rates years

Net book value $160,000 Depreciation

Salvage value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2019.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2019

Depreciation Expense 19,375

Accumulated Depreciation 19,375

11-28 LO 2
 LEARNING OBJECTIVE 3
Impairments Explain the accounting
issues related to asset
impairment.

Recognizing Impairments
A long-lived tangible asset is impaired when a company is not
able to recover the asset’s carrying amount either through
using it or by selling it.

On an annual basis, companies review the asset for indicators

of impairments—that is, a decline in the asset’s cash-generating
ability through use or sale.

11-29 LO 3
 Recognizing Impairments

If impairment indicators are present, then an impairment test

must be conducted.

ILLUSTRATION 11.15
Impairment Test

11-30 LO 3
 Recognizing Impairments
Example: Assume that Cruz SA performs an impairment test for
its equipment. The carrying amount of Cruz’s equipment is
€200,000, its fair value less costs to sell is €180,000, and its
value-in-use is €205,000.
ILLUSTRATION 11.15

€200,000 €205,000
No
Impairment

€180,000 €205,000
11-31 LO 3
 Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11.15

€200,000 €180,000

€180,000 €175,000
11-32 LO 3
 Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11.15

€200,000 €180,000

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000

Accumulated Depreciation—Equipment 20,000

11-33 LO 3
 Impairment Illustrations
Case 1
At December 31, 2020, Hanoi Ltd. has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2020, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2020
and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2020, is VND11,000,000.
4. The remaining useful life of the equipment after December 31,
2020, is two years.
11-34 LO 3
 Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2020, as follows.

VND3,000,000 Impairment Loss

ILLUSTRATION 11.15
VND14,000,000 VND11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000

11-35 LO 3
 Impairment Illustrations

Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2020) VND 11,000,000

Hanoi Ltd. determines that the equipment’s total useful life has not
changed (remaining useful life is still two years). However, the
estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2021.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000

11-36 LO 3
 Impairment Illustrations
Case 2
At the end of 2019, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated remaining
useful life of five years. Because there is little market-related information on
which to base a recoverable amount based on fair value, Verma
determines the machine’s recoverable amount should be based on value-
in-use. Verma uses a discount rate of 8 percent. Verma’s analysis indicates
that its future cash flows will be $40,000 each year for five years, and it will
receive a residual value of $10,000 at the end of the five years. It is
assumed that all cash flows occur at the end of the year.

ILLUSTRATION 11.16
Value-in-Use Computation
11-37 LO 3
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2019.
$33,486 Impairment Loss
ILLUSTRATION 11.15

$200,000 $166,514

Unknown $166,514
11-38 LO 3
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2019.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514
11-39 LO 3
 Reversal of Impairment Loss

Illustration: Tan Group purchases equipment on January 1,

2019, for HK$300,000, useful life of three years, and no
residual value.

At December 31, 2019, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
11-40 LO 3
 Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2020, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.

Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000

11-41 LO 3
 Impairments

Cash-Generating Units
When it is not possible to assess a single asset for impairment
because the single asset generates cash flows only in
combination with other assets, companies identify the smallest
group of assets that can be identified that generate cash flows
independently of the cash flows from other assets.

11-42 LO 3
 Impairments

Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).

 No depreciation or amortization is taken on assets held

for disposal during the period they are held.

 Can write up or down an asset held for disposal in future

periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before
the impairment.

11-43 LO 3
 ILLUSTRATION 11.18
Graphic of Accounting for
Impairments

11-44 LO 3
 LEARNING OBJECTIVE 5
Revaluations Apply the accounting for
revaluations.

Recognizing Revaluations
Companies may value long-lived tangible asset subsequent to
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for its
railroad network.

► Increased long-lived tangible assets by £4,289 million.

► Change in the fair value accounted for by adjusting the asset

account and establishing an unrealized gain.

► Unrealized gain is often referred to as revaluation surplus.

11-45 LO 5
 Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for €1,000,000
on January 5, 2019. The company elects to use revaluation
accounting for the land in subsequent periods. At December 31,
2019, the land’s fair value is €1,200,000. The entry to record the
land at fair value is as follows.

Land 200,000
Unrealized Gain on Revaluation - Land 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

11-46 LO 5
 Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2019. The equipment has a useful life of
five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the equipment.
Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5)
at December 31, 2019, as follows.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000

11-47 LO 5
 Recognizing Revaluation

Revaluation—Depreciable Assets
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment at December 31, 2019,
which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000

11-48 LO 5
 Recognizing Revaluation

Revaluation—Depreciable Assets
ILLUSTRATION 11.22
Financial Statement
Presentation—Revaluations

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

11-49 LO 5
 Revaluation of Land

Revaluation—2019: Valuation Increase

Assume that Unilever Group (GBR and NLD) purchased land on
January 1, 2019, that cost €400,000. Unilever decides to report
the land at fair value in subsequent periods. At December 31,
2019, an appraisal of the land indicates that its fair value is
€520,000. Unilever makes the following entry to record the
increase in fair value.

Land 120,000
Unrealized Gain on Revaluation—Land 120,000
(€520,000 − €400,000)

11-50 LO 7
 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.1
Summary of Revaluation—2019

 Land is now reported at its fair value of €520,000.

 The increase in the fair value of €120,000 is reported on the

statement of comprehensive income.

 The ending balance in Unrealized Gain on Revaluation—Land

is reported as accumulated other comprehensive income in
the statement of financial position in the equity section.
11-51 LO 7
 Revaluation—2020: Decrease below
Historical Cost
What happens if the land’s fair value at December 31, 2020, is
€380,000, a decrease of €140,000 (€520,000 − €380,000)? In this
case, the land’s fair value is below its historical cost. Unilever
makes the following entry on December 31, 2020 to record the
decrease in fair value of the land.

Unrealized Gain on Revaluation—Land 120,000

Loss on Impairment 20,000
Land (€520,000 − €380,000) 140,000

11-52 LO 7
 Revaluation—2020: Decrease below Cost
ILLUSTRATION 11A.2
Summary of Revaluation—2020

 The debit to Unrealized Gain on Revaluation—Land of

€120,000 reduces other comprehensive income, which
reduces accumulated other comprehensive income.

 The debit to Loss on Impairment of €20,000 reduces net

income and retained earnings.
11-53 LO 7
 Revaluation—2021: Recovery of
Impairment Loss
At December 31, 2021, Unilever’s land value increases to
€415,000, an increase of €35,000 (€415,000 − €380,000). In this
case, the Loss on Impairment of €20,000 is reversed and the
remaining increase of €15,000 is reported in other comprehensive
income. Unilever makes the following entry to record this
transaction.

Land 35,000
Unrealized Gain on Revaluation—Land 15,000
Recovery of Impairment Loss 20,000

11-54 LO 7
 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

On January 2, 2022, Unilever sells the land for €415,000. Unilever

makes the following entry to record this transaction.

Cash 415,000
Land 415,000

11-55 LO 7
 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

Since the land is sold, Unilever has the option to transfer

Accumulated Other Comprehensive Income (AOCI) to Retained
Earnings.

Accumulated Other Comprehensive Income 15,000

Retained Earnings 15,000
11-56
 Revaluation—2021: Recovery of
Impairment Loss
 The purpose of this transfer is to eliminate the unrealized gain
on the land that was sold.

 Transfers from Accumulated Other Comprehensive Income

cannot increase net income.

 Even though the land has appreciated in value by €15,000,

Unilever is not able to recognize this gain in net income over
the periods that it held the land.

11-57 LO 7
 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

LEARNING OBJECTIVE 7
Illustrate revaluation accounting procedures.

The general rules for revaluation accounting are as follows.

1. When a company revalues its long-lived tangible assets above

historical cost, it reports an unrealized gain that increases other
comprehensive income.

2. If a company experiences a loss on impairment (decrease of

value below historical cost), the loss reduces income and
retained earnings. Thus, gains on revaluation increase equity
but not net income.

11-58 LO 7
 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

3. If a revaluation increase reverses a decrease that was

previously reported as an impairment loss, a company credits
the revaluation increase to income using the account Recovery
of Impairment Loss up to the amount of the prior loss. Any
additional valuation increase above historical cost increases
other comprehensive income and is credited to Unrealized Gain
on Revaluation.

4. If a revaluation decrease reverses an increase that was

reported as an unrealized gain, a company first reduces other
comprehensive income by eliminating the unrealized gain. Any
additional valuation decrease reduces net income and is
reported as a loss on impairment.
11-59 LO 7
 Revaluation of Depreciable Assets

Revaluation—2019: Valuation Increase

Assume that Nokia (FIN) purchases equipment for €1,000,000 on
January 2, 2019. The equipment has a useful life of five years, is
depreciated using the straight-line method of depreciation, and its
residual value is zero. Nokia chooses to revalue its equipment to
fair value over the life of equipment. On December 31, 2019,
Nokia records depreciation expense of €200,000 (€1,000,000 ÷ 5)
as follows.

Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000

11-60 LO 7
 Revaluation—2019: Valuation Increase
After this entry, Nokia’s equipment has a carrying amount of
€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.
1. Reduces the Accumulated Depreciation—Equipment account
to zero.

2. Reduces the Equipment account by €50,000—it then is

reported at its fair value of €950,000.

11-61 LO 7
 Revaluation—2019: Valuation Increase
After this entry, Nokia’s equipment has a carrying amount of
€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.
3. Records an Unrealized Gain on Revaluation—Equipment for
the difference between the fair value and carrying amount of
the equipment, or €150,000 (€950,000 − €800,000). The
entry to record this revaluation at December 31, 2019, is:

Accumulated Depreciation—Equipment 200,000

Equipment 50,000
Unrealized Gain on Revaluation—Equipment 150,000
11-62
 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.4
Summary of Revaluation—2019

 The carrying amount of the asset is now €950,000.

 Nokia reports depreciation expense of €200,000 in the income

statement and Unrealized Gain on Revaluation—Equipment of
€150,000 in other comprehensive income.

11-63 LO 7
 Revaluation—2020: Decrease below
Historical Cost
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2020 is €237,500 (€950,000 ÷ 4),
and the entry to record depreciation expense on December 31,
2020 as follows.

Depreciation Expense 237,500

Accumulated Depreciation—Equipment 237,500

Under IFRS, Nokia may transfer from AOCI the difference between
depreciation based on the revalued carrying amount of the
equipment and depreciation based on the asset’s original cost to
retained earnings.
11-64 LO 7
 Revaluation—2020: Decrease below Cost

Depreciation based on the original cost was €200,000 (€1,000,000

÷ 5) and on fair value is €237,500, or a difference of €37,500
(€237,500 − €200,000). The entry to record this transfer at
December 31, 2020 is as follows.

Accumulated Other Comprehensive Income 37,500

Retained Earnings 37,500

Before revaluation in 2020, Nokia has the following amounts related

to its equipment.

11-65 LO 7
 Revaluation—2020: Decrease below Cost

Nokia determines through appraisal that the equipment now has a

fair value of €570,000. To report the equipment at fair value, Nokia
does the following.
1. Reduces the Accumulated Depreciation—Equipment account of
€237,500 to zero.

2. Reduces the Equipment account by €380,000 (€950,000 −

€570,000)—it then is reported at its fair value of €570,000.

11-66 LO 7
 Revaluation—2020: Decrease below Cost

3. Reduces Unrealized Gain on Revaluation—Equipment by

€112,500, to off set the balance in the unrealized gain account
(related to the revaluation in 2019).

4. Records a loss on impairment of €30,000.

Accumulated Depreciation—Equipment 237,500

Loss on Impairment 30,000
Unrealized Gain on Revaluation—Equipment 112,500
Equipment 380,000
11-67 LO 7
 ILLUSTRATION 11A.5
Summary of Revaluation—2020

 The carrying amount of the equipment is now €570,000.

 Nokia reports depreciation expense of €237,500 and an

impairment loss of €30,000 in the income statement.

 Nokia reports the reversal of the previously recorded

unrealized gain by recording the transfer to retained earnings
of €37,500 and the entry to Unrealized Gain on Revaluation—
Equipment of €112,500.
11-68 LO 7
 Revaluation—2021: Recovery of
Impairment Loss
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2021 is €190,000 (€570,000 ÷ 3),
and the entry to record depreciation expense on December 31,
2021 as follows.

Depreciation Expense 190,000

Accumulated Depreciation—Equipment 190,000

11-69 LO 7
 Nokia transfers the difference between depreciation based on the
revalued carrying amount of the equipment and depreciation based
on the asset’s original cost from AOCI to retained earnings.
Depreciation based on the original cost was €200,000 (€1,000,000
÷ 5) and on fair value is €190,000.

Retained Earnings 10,000

Accumulated Other Comprehensive Income 10,000

Before revaluation in 2021, Nokia has the following amounts related

to its equipment.

11-70 LO 7
 Revaluation—2021: Recovery of Loss
Nokia determines through appraisal that the equipment now has a
fair value of €450,000. To report the equipment at fair value, Nokia
does the following.

1. Reduces the Accumulated Depreciation—Equipment

account of €190,000 to zero.

2. Reduces the Equipment account by €120,000 (€570,000 −

€450,000)—it then is reported at its fair value of €450,000.

3. Records an Unrealized Gain on Revaluation—Equipment

for €40,000.

4. Records a Recovery of Loss on Impairment for €30,000.

11-71 LO 7
 Revaluation—2021: Recovery of Loss
Nokia determines through appraisal that the equipment now has a
fair value of €450,000. To report the equipment at fair value, Nokia
does the following. The entry to record this transaction is as
follows.

Accumulated Depreciation—Equipment 190,000

Unrealized Gain on Revaluation—Equipment 40,000
Equipment 120,000
Recovery of Loss on Impairment 30,000

11-72 LO 7
 ILLUSTRATION 11A.6
Summary of Revaluation—2021

On January 2, 2022, Nokia sells the equipment for €450,000. Nokia

makes the following entry to record this transaction.

Cash 450,000
Equipment 450,000

Nokia does not record a gain or loss because the carrying amount
of the equipment is the same as its fair value.

11-73 LO 7
 ILLUSTRATION 11A.6
Summary of Revaluation—2021

Nokia transfers the remaining balance in Accumulated Other

Comprehensive Income to Retained Earnings.

Accumulated Other Comprehensive Income 50,000

Retained Earnings 50,000

Even though the equipment has appreciated in value by €50,000,

the company does not recognize this gain in net income.

11-74 LO 7
 Revaluation Ex1
Wang Company owns land (cost $200,000) for which it
uses revaluation accounting. It has the following
information related to this asset, the only land asset
that Wang owns. Wang sells the land on January 15,
2022 for $220,000.

Date Fair Value

January 1, 2019 $200,000
December 31, 2019 215,000
December 31, 2020 185,000
December 31, 2021 205,000

Prepare all entries related to the land in 2019-2022.

11-75
 Date Fair Value
January 1, 2019 $200,000
December 31, 2019 215,000
December 31, 2020 185,000
December 31, 2021 205,000

AOCI (Land)

11-76
 Revaluation Ex2
Wang Company purchased an equipment on December 31,
2018 (cost $200,000) for which it uses revaluation
accounting. Its useful life is 9 years, residual value is
$20,000. It has the following information related to this
equipment, the only equipment that Wang owns.

Date Fair Value

January 1, 2019 $200,000
December 31, 2019 170,000
December 31, 2020 167,000
December 31, 2021 120,000

Prepare all entries related to the equipment in 2019-2021.

11-77
 Revaluations Exercise - 2
Date Fair
Value
January 1, 2019 $200,000
December 31, 2019 170,000
December 31, 2020 167,000
December 31, 2021 120,000

11-78
 Revaluations Exercise - 2
Date Fair
Value
January 1, 2019 $200,000
December 31, 2019 170,000
December 31, 2020 167,000
December 31, 2021 120,000

11-79
 Recognizing Revaluation

Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar nature
and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.

11-80 LO 5
 LEARNING OBJECTIVE 6
Presentation and Analysis Demonstrate how to report
and analyze property, plant,
equipment, and mineral
resources.
Presentation of Property,
Plant, Equipment, and Mineral Resources
Depreciating assets, use Accumulated Depreciation.

Depleting assets may include use of Accumulated Depletion

account, or the direct reduction of asset.

Disclosures  Basis of valuation (usually cost)

 Pledges, liens, and other commitments

11-81 LO 6
 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Asset Turnover

Siemens Group Measures how

efficiently a company
uses its assets to
generate sales.

ILLUSTRATION 11.24
Asset Turnover
11-82 LO 6
 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Profit Margin on Sales

Siemens Group Measure of the ability to

generate operating
income from a
particular level of sales.

ILLUSTRATION 11.25
11-83 Profit Margin on Sales LO 6
 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Return on Assets

Siemens Group Measures a firm’s

success in using
assets to generate
earnings.

ILLUSTRATION 11.26
11-84 Return on Assets LO 6
 Presentation and Analysis

By relating the profit margin on sales to the asset turnover, we can

ascertain how profitably the company used assets during that period
of time in a measure of the return on assets.

Rate of Return Profit Margin on Asset Turnover

= x
on Assets Sales

Net Income Net Income Net Sales

= x
Average Total Assets Net Sales Average Total Assets

11-85 LO 6
 Presentation and Analysis

By relating the profit margin on sales to the asset turnover, we can

ascertain how profitably the company used assets during that period
of time in a measure of the return on assets.

Rate of Return Profit Margin on Asset Turnover

= x
on Assets Sales

€5,584 €5,584 €79,644

= x
(€125,717 + €120.348) €79,644 (€125,717 + €120.348)
/2 /2

4.5% = 7.0% x .65

11-86 LO 6