Depreciation - amortization of property, plant, and equipment. Depletion - amortization of mineral resource properties

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1 Property, plant, and equipment (PP&E) - include long-term resources such as office, factory, and warehouse buildings, investment property, equipment (machinery, furniture, tools), mineral resource properties - aka tangible capital assets, plant assets, or fixed assets Depreciation - amortization of property, plant, and equipment Depletion - amortization of mineral resource properties Amortization - used for intangibles - may be used in a general sense to refer to the allocation of the cost of any long-lived asset to different accounting periods Definition of PPE 1. held for use in the production of goods and services, for rental to others, or for administrative purposes - not intended for sale in the ordinary course of business 2. used over more than one accounting period and are usually depreciated 3. tangible any items that have multiple uses and are regularly used and replaced within the accounting period are classified as inventory major spare parts and standby or servicing equipment used only with a specific capital asset and useful for more than one period are classified as items of PPE Biological assets (living plants and animals) PPE o ASPE: same acctg principles used for other items of PPE o IFRS: specific standards for biological assets Recognition Criteria 1. Future economic benefits 2. Cost can be reliably measured Capitalized - Included in asset s cost if both criteria for recognition met - recognize as PPE Expensed - Costs incurred but recognition criteria not met - Repair and ongoing maintenance Unit of measure - What level of asset to recognize Componentization (required in IFRS) - Degree may be based on significance of individual parts to the whole asset - Different components may have different useful lives and depreciation will be different - ASPE: done only if practical

2 BE10-2 Playtime Corporation purchased a new piece of equipment for production of a new children's toy. According to market research tests, the toy is expected to be very popular among preschool-aged children. The equipment consists of the following significant and separable parts: injection unit (useful life of six years), clamping unit (useful life of six years), and electrical equipment (useful life of three years). The equipment also includes other parts (useful life of five years). Discuss (a) the recognition criteria for recording purchase of the equipment, (b) how the equipment purchase should be recorded if Playtime prepares financial statements in accordance with IFRS, and (c) how the equipment purchase should be recorded if Playtime prepares financial statements in accordance with ASPE. a) the equipment can be recognized as PPE since its cost can be reliably determined (purchase cost) and it can generate future benefits for the company as it will be used to produce a toy that is projected to be very popular among preschoolers b) Under IFRS, the purpose should be recorded according to its individual components based on the useful life of each component c) Under ASPE, the company do not have to componentize but can choose to if practical for them Cost Elements - All expenditures needed to acquire the asset and bring it to its location and ready it for use should be capitalized o item s purchase price net of trade discounts and rebates, plus any non-refundable purchase taxes and duties o employee costs needed to acquire or construct the asset; delivery and handling costs; site preparation, installation, and assembly costs; net material and labour costs incurred to ensure it is working properly; and professional fees o estimate of the costs of obligations associated with the asset's eventual disposal. (e.g., some or all of the costs of the asset's decommissioning and site restoration) - Not capitalized o Initial operating losses o costs of training employees to use the asset o costs associated with a reorganization of operations o administration and general overhead costs o costs of opening a new facility, introducing a new product or service, and operating in a new location Temporary Use of Land During Construction IFRS o Capitalization of costs stops when asset is in place and ready to be used as mgmt intended, even if it has not begun to be used or is used at less than desirable capacity level o Principle of being a necessary cost to acquire and get in place and ready for use strictly applied o Temporary use of land and associated net cost or revenue is not necessary to develop the asset being constructed not capitalized but recognized in income ASPE o Capitalization of costs stops when asset is substantially complete and ready for productive use as determined in advance by mgmt o Any net revenue or expenses generated prior to substantial completion and readiness for use are included in asset s cost

3 Self-Constructed Assets - Only directly attributable costs (costs directly related to the specific activities involved in the construction process) are capitalized Borrowing Costs IFRS: capitalize if directly attributable to cost of acquiring, constructing, or producing PPE ASPE: can choose between capitalizing and expensing Dismantling and Restoration Costs - Asset retirement costs added to PPE asset cost - IFRS o recognize costs of both legal and constructive obligations o Include acquisition costs only, not product costs - ASPE o recognize costs associated with legal obligations only o Costs include both retirement obligations resulting from acquisition and its subsequent use in producing inventory BE10-3 Barnet Brothers Inc. purchased land and an old building with the intention of removing the old building and then constructing the company's new corporate headquarters on the land. The land and old building were purchased for $570,000. Closing costs were $6,000. The old building was removed at a cost of $48,000. After readying the land for its intended use, and while waiting for construction to begin, Barnet generated net revenue of $4,000 from using the land as a parking lot. Determine the amount to be recorded as the land cost, and the treatment of the net revenue of $4,000, if Barnet prepares financial statements in accordance with (a) IFRS and (b) ASPE. a) Under IFRS, land cost = 570, , ,000 = $624,000. Net revenue of $4,000 should be treated as income: Dr. Cash and Cr. Rent revenue b) Under ASPE, net revenue of $4,000 will be deducted from the cost of land: Dr. Cash and Cr. Land. Land cost = 570, , ,000 4,000 = $620,000 BE10-4 Northern Utilities Corporation incurred the following costs in constructing a new maintenance building during the fiscal period. a. Direct labour costs incurred up to the point when the building is in a condition necessary for use as management intended, but before Northern Utilities begins operating in the building, $73,000 b. Additional direct labour costs incurred before Northern begins operating in the building, $6,000 c. Material purchased for the building, $82,500 d. Interest on the loan to finance construction until completion, $2,300 e. Allocation of plant overhead based on labour hours worked on the building, $29,000 f. Architectural drawings for the building, $7,500 g. Allocation of the president's salary, $54,000 What costs should be included in the cost of the new building if Northern prepares financial statements in accordance with IFRS? With ASPE? (Assume that if there is no specific guidance from GAAP, Northern's management would consider a building ready for productive use when Northern begins operating in the building, and would prefer not to capitalize interest costs directly attributable to the acquisition, construction, or development of property, plant, and equipment.)

4 a) IFRS a, c, d, e, f = 194,300 b) ASPE a, c, e, f = 192,000 Measurement of Cost Cash discounts not taken Deferred payment terms Lump-sum purchases Nonmonetary exchanges share-based payments Nonmonetary exchanges asset exchanges Contributed assets and government grants Cash Discounts - discount taken, reduction in asset s purchase price - record cost at net-of-discount whether discount is taken or not Deferred Payment Terms - record cost at PV of note; difference recognized as interest Example: assume that Sutter Corporation purchases a specially built robot spray painter for its production line. The company issues a $100,000, five-year, non-interest-bearing note to Wrigley Robotics Ltd. for the new equipment when the prevailing market interest rate for obligations of this nature is 10%. Sutter is to pay off the note in five $20,000 instalments made at the end of each year. Assume that the fair value of this specially built robot cannot readily be determined. PVFOA of note (i=10, n=5) = 20,000 x = 75,816 Equipment 75,816 Notes Payable 75,816 At end of Year 1: Interest Expense (75,816 x 10%) 7,582 Notes Payable 7,582 Notes Payable 20,000 Cash 20,000 Lump-Sum Purchases - allocate costs based on relative fair values example: several assets purchased for 80,000 Fair Value Inventory 25,000 25% 20,000 Land 25,000 25% 20,000 Building 50,000 50% 40, ,000 80,000

5 Nonmonetary Exchanges Share-Based Payments IFRS: FV of asset; if cannot be reliably determined, FV of shares ASPE: whichever is more reliable (usually FV of asset) BE10-9 Wizard Corp., a private company, obtained land by issuing 2,000 of its no par value common shares. The land was appraised at $85,000 by a reliable, independent valuator on the date of acquisition. Last year, Wizard sold 1,000 common shares at $41 per share. Prepare the journal entry to record the land acquisition if Wizard elects to prepare financial statements in accordance with IFRS and with ASPE. For both IFRS and ASPE: Land 85,000 Common Shares 85,000 E10-3 (2) Producers issues 13,000 no par value common shares in exchange for land and buildings. The property has been appraised at a fair value of $1,630,000, of which $407,000 has been allocated to land, $887,000 to the structure of the buildings, $220,000 to the building HVAC heating, ventilation, air conditioning, and $116,000 to the interior coverings in the buildings (such as flooring). Producers' shares are not listed on any exchange, but a block of 100 shares was sold by a shareholder 12 months ago at $57 per share, and a block of 200 shares was sold by another shareholder 18 months ago at $33 per share. Land 407,000 Building structure 887,000 Building HVAC 220,000 Building interior coverings 116,000 Common Shares 1,630,000 Asset Exchanges - general principle: FV of assets given up; if cannot be reliably measured, FV of new asset o gains/losses recognized in income - except if one of the following is true: o Transaction lacks commercial substance o Fair values not reliably measurable carrying amount of assets given up, adjusted for any cash or other monetary assets asset acquired cannot be recognized more than fair value; carrying amt > FV, record at lower FV and recognize loss Commercial Substance - significant change in company s expected future cash flows and therefore its value a) amount, timing, or risk of future cash flows associated with assets received is different from the configuration of cash flows for assets given up b) specific value of part of the entity affected by the transaction has changed as a result c) difference in (a) or (b) is significant relative to FV of assets exchanged Ability to Measure Fair Values - helps reduce risk that entities can assign arbitrarily high values to assets exchanged to report gains

6 Accounting for Asset Exchanges Meets Both Criteria Does Not Meet Either Criteria Apply FV standard Exception to FV Standard: Cost of assets rcvd = FV of assets given up or Cost of assets rcvd = carrying amt of assets given up assets acquired if more reliably measurable No gain recognized. Loss recognized if carrying amt Diff bet carrying amt and FV gain/loss of assets given up > FV of assets acquired Boot - transaction s monetary requirement - as it decreases likelihood that nonmonetary increases (evaluate for commercial substance) Example 1: Assume that Information Processing, Inc. trades in its used machine for a new model. The machine given up has a book value of $8,000 (original cost of $12,000 less $4,000 accumulated depreciation) and a fair value of $6,000. It is traded for a new model that has a list price of $16,000. In negotiations with the seller, a trade-in allowance of $9,000 is finally agreed on for the used machine. Fair value of assets given up: Purchase price of machine acquired = Cash paid (16,000 9,000) 7,000 Fair value of machine given up 6,000 Cost of new machine = fair value of assets given up 13,000 (commercial substance) Fair value of old machine 6,000 Book value of old machine (8,000) Loss on disposal of used machine 2,000 Equipment (new) 13,000 Accumulated depreciation equipment (old) 4,000 Loss on Disposal of Equipment 2,000 Equipment (old) 12,000 Cash 7,000 Example 2: Cathay Corporation exchanges several used trucks plus cash for vacant land that might be used for a future plant site. The trucks have a combined carrying amount of $42,000 (cost of $64,000 less $22,000 of accumulated depreciation). Cathay's purchasing agent, who has had previous dealings in the second-hand market, indicates that the trucks have a fair value of $49,000. In addition to the trucks, Cathay pays $4,000 cash for the land. Fair value of assets given up: Fair value of cash given up 4,000 Fair value of trucks given up 49,000 Cost of land = fair value of assets given up 53,000 Land 53,000 Accumulated depreciation - trucks 22,000 Trucks 64,000 Cash 4,000 Gain on disposal of trucks (49,000 42,000) 7,000

7 Example 3: Westco Limited owns a number of rental properties in Western Canada as well as a single property in Ontario. Management has decided to concentrate its business in the west and to dispose of its one property outside this area. Westco agrees to exchange its Ontario property for a similar commercial property outside Lethbridge, Alberta, owned by Eastco Limited, a company with many properties east of Manitoba. The two properties are almost identical in size, rentals, and operating costs. Eastco agrees to the exchange but requires a cash payment of $30,000 from Westco to equalize and complete the transaction. Assume an evaluation by both Westco and Eastco management indicates that there is an insignificant difference in the configuration of future cash flows and that commercial substance is not indicated. What entry would be made by each company to record this asset exchange? Westco Eastco Building 520, ,000 Accumulated depreciation 100, ,000 Carrying amount 420, ,000 Fair value 615, ,000 Carrying amt of building given up 420, ,000 Cash paid 30,000 Cash received (30,000) Cost of building acquired 450, ,000 Westco Buildings (new) 450,000 Accumulated depreciation Buildings (old) 100,000 Buildings (old) 520,000 Cash 30,000 Eastco Buildings (new) 365,000 Accumulated depreciation Buildings (old) 145,000 Cash 30,000 Buildings (old) 540,000 Contributed Assets and Government Grants - non-reciprocal transfers (nothing given in exchange) - use asset s fair value donated assets - capital approach o used when asset donated by owner (rare) o credit Contributed Surplus Donated Capital - income approach o reflects contributions in net income - source is not owner government grants - cost reduction method o reduce asset cost (and therefore future depreciation) by amount received o reports assets at less than FV

8 - deferral method o record amount received as a deferred credit and amortize to revenue over asset s life o not consistent with conceptual framework since deferred revenue does not meet def of liability - donation of land o may be deferred and taken into income over future periods o taken directly into income when rcvd if can t associate grant with future periods - awarded for incurring certain current expenditures (i.e.payroll) o recognized in income in the same period as related expenses Example: assume that a company receives a grant of $225,000 from the federal government to upgrade its sewage treatment facility. 10-year life, straight-line depreciation Cost reduction: Cash 225,000 Equipment 225,000 Depreciation Expense reduce by 22,5000 every year (increase in revenue per year) Deferral: Cash 225,000 Deferred revenue government grants 225,000 Deferred revenue government grants 22,500 Revenue government grants 22,500 E10-21 Lightstone Equipment Ltd. wanted to expand into New Brunswick and was impressed by the provincial government's grant program for new industry. After being sure that it would qualify for the grant program, it purchased property in downtown Saint John on June 15, The property cost $235,000 and Lightstone spent the next two months gutting the building and reconstructing the two floors to meet the company's needs. The building has a useful life of 20 years and an estimated residual value of $65,000. In late August, the company moved into the building and began operations. Additional information follows: 1. The property was assessed at $195,000, with $145,000 allocated to the land. 2. Architectural drawings and engineering fees related to the construction cost $18, The company paid $17,000 to the contractor for gutting the building and $108,400 for construction. Lightstone expects that these improvements will last for the remainder of the life of the building. 4. The provincial government contributed $75,000 toward the building costs. a) Assuming that the company uses the cost reduction method to account for government assistance, answer the following: 1. What is the cost of the building on Lightstone Equipment's statement of financial position at August 31, 2014, its fiscal year end? Purchase: Land 145, % 174,744 Building 50, % 60, , ,000 total building cost = 60, , , ,400 = 203,656

9 Land 174,744 Buildings 203,656 Cash 378,400 Cash 75,000 Buildings 75,000 Carrying amount of building = 203,656 75,000 = 128, What is the effect of this capital asset on the company's income statement for the company's year ended August 31, 2015? Depreciation Expense 3,183 Accumulated Depreciation Buildings ((128,656 65,000)/20) 3,183 Carrying amount of building = 128,656 3,183 = 125,473 Decrease in depreciation expense, increase in net income by 3,750 b) Assuming the company uses the deferral method to account for government assistance, answer the following: 1. What is the cost of the building on Lightstone Equipment's statement of financial position at August 31, 2014? Purchase: Land 145, % 174,744 Building 50, % 60, , ,000 total building cost = 60, , , ,400 = 203,656 Land 174,744 Buildings 203,656 Cash 378,400 Cash 75,000 Deferred revenue government grants 75, What is the effect of this capital asset on the company's income statement for the company's year ended August 31, 2015? Depreciation Expense 6,933 Accumulated Depreciation Buildings ((203,656 65,000)/20) 6,933 Deferred revenue government grants 3,750 Revenue government grants (75,000/20) 3,750 increase in net income by 3,750

10 Costs Associated with Specific Assets Land - purchase price - closing costs (title to land, legal fees, recording fees) - costs of getting land ready for intended use (removal of old building, grading, filling, draining, clearing) - costs of assuming any liens (taxes in arrears, mortgages, encumbrances on property) - any additional land improvements that have an indefinite life purchased to construct a building - all costs incurred up to excavation for new building considered land costs - amounts received from salvaged materials treated as reductions in land cost land improvements - charged to Land account o if permanent special amounts assessed for local improvements (sewers etc.), landscaping - recorded separately as Land Improvements o if limited lives private driveways, walks, fences, parking lots Buildings - removal of old building previously owned to construct a new one on same land, costs of demolition net any cost recoveries expensed as disposal costs of the old building o increases any loss on disposal of the old asset o remaining book value of old building is included in depreciation expense in its final year of use E10-4 Farrey Supply Ltd. is a newly formed public corporation that incurred the following costs related to land, buildings, and machinery: Legal fees for title search 520 Architect's fees 2,800 Cash paid for land and dilapidated building on it 112,000 Removal of old building 20,000 Less: Salvage 5,500 14,500 Surveying before construction 370 Interest on short-term loans during construction 7,400 Excavation before construction for basement 19,000 Machinery purchased (subject to 2% cash discount, which was not taken) 65,000 Freight on machinery purchased 1,340 Storage charges on machinery, made necessary because building was still under construction when machinery was delivered 2,180 New building constructed (building construction took six months from date of purchase of land and old building) 485,000 Assessment by city for drainage project 1,600 Hauling charges for delivery of machinery from storage to new building 620 Installation of machinery 2,000 Trees, shrubs, and other landscaping after completion of building (permanent in nature) 5,400 Municipal grant to promote locating building in the municipality (8,000)

11 a) Determine the amounts that should be included in the cost of land, buildings, and machinery. Indicate how any amounts that are not included in these accounts should be recorded. (use cost method) Land: Legal fees for title search 520 Cash paid for land and dilapidated building on it 112,000 Removal of old building 20,000 Less: Salvage 5,500 14,500 Assessment by city for drainage project 1,600 Trees, shrubs, and other landscaping after completion of building (permanent) 5,400 Cost of Land 134,020 Building: Architect's fees 2,800 Surveying before construction 370 Excavation before construction for basement 19,000 Interest on short-term loans during construction 7,400 New building constructed (building construction took six months from date of purchase of land and old building) 485,000 Municipal grant to promote locating building in the municipality (8,000) Cost of Building 506,570 Equipment: Machinery purchased (subject to 2% cash discount, which was not taken) (65,000 x 98%) 65,000 Freight on machinery purchased 1,340 Installation of machinery 2,000 Cost of Equipment 68,340 Expenses: Storage charges on machinery, made necessary because building was still under construction when machinery was delivered 2,180 Hauling charges for delivery of machinery from storage to new building 620 b) Assume that Farrey is not a public company, and that it prepares financial statements in accordance with ASPE. Would the solution provided in part (a) be affected? Interest on short-term loans can either be capitalized or expensed c) From the perspective of a potential investor, what are the financial statement effects of capitalizing borrowing costs related to qualifying assets? Decrease expenses, increase net income; increase in asset cost Leasehold Improvements - capital expenditures made on property that is being leased or rented - revert to the lessor at the end of the lease - lessee charges cost to a Leasehold Improvements, and cost amortized as an operating expense over the remaining life of the lease or the useful life of the improvements, whichever is shorter

12 Equipment - delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar tangible capital assets - cost includes purchase price, freight and handling charges that are incurred, insurance on the equipment while in transit, the cost of special foundations if they are required, assembling and installation costs, testing (less net proceeds of items), and costs of making any adjustments to the equipment to make it operate as intended - GST, HST, or QST recoverable - not included in the asset's acquisition cost Investment Property (rental real estate) - Not part of PP&E; accounted for under IAS 40 - property held to generate rentals and/or appreciate in value rather than to sell in the ordinary course of business or to use in production, administration, or supplying goods and services (malls, office bldg) - includes property that is currently under construction for investment purposes as well - if one property used partly as an investment property and is partly owner-occupied o accounted for separately if can be sold separately (or leased as a finance lease separately) - if owner provides a variety of services in connection with an investment property o not investment property if providing the services exposes the owner to the normal risks of running a business (as distinct from investment risk - IFRS and ASPE: cost determined following the same principles as used for PP&E - if the property continues to be accounted for at cost, the components of the property are accounted for separately for purposes of depreciation Natural Resource Properties Mineral resources (wasting assets) - generally refer to minerals and oil and gas resources that do not regenerate Mineral resource properties - capitalized costs associated with the acquired rights, and the exploration, evaluation, and development of minerals resources Acquisition cost normally includes some costs from each of four stages: 1. acquisition of the property 2. exploration for and evaluation of reserves 3. development 4. decommissioning and site restoration depletion base - amount that later will be amortized (through a depletion charge) and form a significant portion of the cost of the mined or extracted inventory - made up of capitalized costs of acquisition, exploration, development, and restoration Biological Assets ASPE same for PPE IFRS - separate standards for assets related to agricultural activity o fruit trees, grapevines, and livestock held to produce wool, milk, or additional livestock assets o measured initially, and at every date of the statement of financial position, at FV - costs to sell o changes in value recognized in the income statement

13 o if no reliable fair value measure can be determined, asset is measured at cost less accumulated depreciation and impairment losses MEASUREMENT AFTER ACQUISITION Costs Incurred After Acquisition capital expenditure o costs incurred achieve greater benefits capitalize revenue expenditure o costs maintain specific level of service expense Major Types of Expenditures additions increase or extension of existing assets o capitalize replacements, major overhauls, and inspections substitution of a new part/component for an existing asset, and overhauls/inspections whether or not physical parts are replaced o capitalize if they extend useful life or increase productivity o expense if they only maintain same level of service rearrangement and reinstallation moving asset from one location to another o expense repairs costs that maintain assets in good operating condition o expense E10-28 The following transactions occurred during Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated residual value. Assume also that depreciation is charged for a full year on all fixed assets that are acquired during the year, and that no depreciation is charged on fixed assets that are disposed of during the year. Jan 30 Mar 10 Mar 20 May 18 Jun 23 A building that cost $132,000 in 1997 was torn down to make room for a new building structure. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged. A new part costing $2,900 was purchased and added to a machine that was purchased in 2012 for $16,000. The new part replaces an original machine part, and does not extend the machine's useful life. The old part's cost was not separable from the original machine's cost. A gear broke on a machine that cost $9,000 in 2009, and the gear was replaced at a cost of $85. The replacement does not extend the machine's useful life. A special base that was installed for a machine in 2008 when the machine was purchased had to be replaced at a cost of $5,500 because of defective workmanship on the original base. The cost of the machinery was $14,200 in The cost of the base was $3,500, and this amount was charged to the Machinery account in One of the buildings was repainted at a cost of $6,900. It had not been painted since it was constructed in a) Prepare general journal entries for the transactions. (Round to nearest dollar.) Depreciation on old building = 5% x 132,000 = 6,600/year Depreciation to date = 6,600 x 17 = 112,200

14 Jan 30 Accumulated depreciation building (old) 112,200 Loss on disposal of building 19,800 Demolition Expenses 5,100 Building 132,000 Cash 5,100 Mar 10 Maintenance and Repairs Expense 2,900 Cash 2,900 Mar 20 Maintenance and Repairs Expense 85 Cash 85 Depreciation = 3,500 x 10% x 5 = 1,750 May 18 Accumulated depreciation equipment 1,750 Loss on disposal of old base 1,750 Equipment 3,500 Equipment 5,500 Cash 5,500 Jun 23 Maintenance and Repairs expense 6,900 Cash 6,900 Measurement Methods for PPE (end of the year) Cost model (CM) Revaluation model (RM) Fair value model (FVM) Accounting Model Choices ASPE IFRS CM RM FVM CM RM FVM Investment property Other PPE Cost Model - most widely used - acquisition cost = cost accumulated depreciation and any accumulated impairment losses Revaluation Model - only for PP&E assets whose fair value can be measured reliably - PP&E assets carried at o fair value at the date of revaluation, less o any subsequent accumulated depreciation and impairment losses - Revaluation not required at each reporting date but must be frequent enough so that carrying value is not materially different from assets fair value (every 3-5 years) If asset's carrying amount is increased (debited) If asset's carrying amount is decreased (credited)

15 credit to Revaluation Surplus (OCI), an equity account unless the increase reverses a revaluation decrease previously recognized in income - recognize the increase in income to the extent of the prior decrease debit to Revaluation Surplus (OCI), an equity account, to the extent of any credit balance associated with that asset account cannot have a debit (that is, a negative) balance. Any remaining amount is recognized in income Asset Adjustment Method 1. A journal entry to close out Acc. Depreciation to Asset (i.e. Asset is recorded at up to date carrying cost) 2. Compare new carrying cost with fair value, if value has increased, check to see if there has been previous losses on this asset recorded in net income. If not, then: Dr. Asset Cr Revaluation Surplus (OCI) for the increased amt for the increased amt Otherwise: Dr. Asset Cr Revaluation Gain (Net Income) Cr. Revaluation Surplus (OCI) for the increased amt for the increased amt up to the previous loss for the remaining amt If value has decreased, check to see if the Revaluation Surplus has a credit balance for the asset, if yes then: Dr. Revaluation Surplus (OCI) Dr. Revaluation Loss (Net Income) Cr. Asset for the decreased amt up to balance in the account for the remaining amt for the decreased amt If there is no balance in the revaluation surplus: Dr. Revaluation Loss (Net Income) Cr. Asset for the decreased amt for the decreased amt There can be no net increase in net income from revaluing the asset over its life Revaluation Surplus never carries a debit balance. Upon disposal of asset, transfer surplus to retained earnings directly (i.e. no recycling into net income) Example: Convo Corp. (CC) purchases a building in early January 2010 and the cost of the basic structure of $100,000 is classified in an account called Buildings. CC accounts for this class of asset using the revaluation model, revalues the class every three years, and uses straight-line depreciation. The building structure is expected to have a useful life of 25 years with no residual value. CC has a December 31 fiscal year end. The asset's fair value at December 31, 2012, is $90,000 and at December 31, 2015, it is $75,000. Prepare all journal entries needed at revaluation dates noted above. December 31, 2010, 2011, 2012:

16 Depreciation Expense ((100,000 0)/25) 4,000 Accumulated depreciation buildings 4,000 December 31, 2012: Before Revaluation Adjustments After Revaluation Buildings 100,000 (12,000) 90,000 2,000 Accumulated depreciation, (4,000 x 3) (12,000) 12,000 0 Carrying amount 88,000 2,000 90,000 Accumulated depreciation buildings 12,000 Buildings 12,000 To eliminate the accumulated depreciation Buildings (90,000 88,000) 2,000 Revaluation Surplus (OCI) 2,000 To adjust the Buildings account to fair value December 31, 2013, 2014, 2015 Depreciation Expense ((90,000 0)/22) 4,091 Accumulated depreciation buildings 4,091 December 31, 2015: Before Revaluation Adjustments After Revaluation Buildings 90,000 (12,273) 75,000 (2,727) Accumulated depreciation, (4,091 x 3) (12,273) 12,273 0 Carrying amount 77,727 (2,727) 75,000 Accumulated depreciation buildings 12,273 Buildings 12,273 To eliminate the accumulated depreciation Revaluation Surplus (OCI) 2,000 Revaluation Gain or Loss 727 Buildings 2,727 To adjust the Buildings account to fair value Fair Value Model - Available as measurement option for investment properties (under IFRS only) - Investment property measured at fair value subsequent to acquisition - Changes in value reported in net income during period of change - No depreciation is recognized over asset s life - fair value must be disclosed in financial statements, even if cost model is chosen Example: Erican Corp. (EC) acquired a small 10-store shopping mall in eastern Canada for $1 million on February 2, The mall qualifies as investment property under IAS 40 Investment Property. At this time, nine of the stores were leased with remaining lease terms of two to four years. In addition to the purchase price, EC had to pay a $40,000 property transfer fee and legal fees of $3,000, and the company decided to

17 paint the empty store at a cost of $2,000 before advertising it for rent. The acquisition was financed by assuming a $730,000 mortgage from the previous owner, who also turned over $37,000 of tenant damage deposits. The remainder of the transaction was settled in cash. On December 31, 2014, the fair value of the shopping centre property was determined to be $1,040,000; on December 31, 2015, it was $1,028,000, and on December 31, 2016, it had risen to $1,100,000. EC has a December 31 year end and applies the fair value method to all its investment property. Purchase price 1,000,000 Property transfer fee 40,000 Legal fees 3,000 Cost of Investment Property 1,043,000 Empty store painting (before rent) 2,000 Mortgage financing assumed (rest in cash) (730,000) Tenant damage deposits acquired (37,000) Cash paid 278,000 Fair values: December 31, 2014: 1,040,000 December 31, 2015: 1,028,000 December 31, 2016: 1,100,000 REQUIRED: Prepare all necessary journal entries to December 31, 2016 February 2, 2014: Investment Property 1,043,000 Maintenance and Repairs Expense 2,000 Mortgage Payable 730,000 Tenant damage deposits liability 37,000 Cash 278,000 December 31, 2014: Loss in Value of Investment Property 3,000 Investment Property (1,043,000 1,040,000) 3,000 December 31, 2015: Loss in Value of Investment Property 12,000 Investment Property (1,040,000 1,028,000) 12,000 December 31, 2016: Investment Property (1,100,000 1,028,000) 72,000 Gain in Value of Investment Property 72,000 E10-26 On January 1, 2014, ABC Company acquires a building at a cost of $125,000. The building is expected to have a 25-year life and no residual value. The asset is accounted for under the revaluation model, using the asset adjustment method. Revaluations are carried out every three years. On December 31, 2016, the fair value of the building is appraised at $120,000, and on December 31, 2019, its fair value is $90,000. ABC Company applies IFRS.

18 Instructions a) Prepare the journal entry(ies) required on December 31, Depreciation expense 5,000 Accumulated depreciation buildings 5,000 (125,000/25) b) Prepare the journal entry(ies) required on December 31, Depreciation expense 5,000 Accumulated depreciation buildings 5,000 (125,000/25) c) Prepare the journal entry(ies) required on December 31, Depreciation expense 5,000 Accumulated depreciation buildings 5,000 (125,000/25) Accumulated depreciation buildings 15,000 Buildings 15,000 (5,000 x 3) Buildings 10,000 Revaluation Surplus - OCI 10,000 (120, 000 (125,000 15,000)) d) Prepare the journal entry(ies) required on December 31, Depreciation expense 5,455 Accumulated depreciation buildings 5,455 (120,000/22) e) Prepare the journal entry(ies) required on December 31, Depreciation expense 5,455 Accumulated depreciation buildings 5,455 (120,000/22) Accumulated depreciation buildings 16,365 Buildings 16,365 (5,455 x 3) Revaluation Surplus - OCI 10,000 Revaluation Gain or Loss 3,635 Buildings 13,635 (120,000 16,365 90,000) Practice Questions

19 Land and building: E10-9 Monetary and non-monetary asset exchange: E10-11, E10-19 Purchase with debt: E10-15 Subsequent Expenditures: E10-27 Subsequent measurement: Cost vs Fair value: E10-23 Revaluation model: E10-25 a and b Problems: P10-3, P10-7, P10-9, P10-11