Question

Falcetto Company acquired equipment on January 1, 2016, for \(12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year period. The appraised value of the equipment approximates the carrying amount at December 31, 2016 and 2018. On December 31, 2017, the fair value of the equipment is determined to be \)7,000.

Instructions

1. Prepare the journal entries for 2016 related to the equipment.
2. Prepare the journal entries for 2017 related to the equipment.

Determine the amount of depreciation expense that Falcetto will record on the equipment in 2018.

Short answer

1. Depreciation expense is $2,000.
2. The equipment value is $5,000.
3. Depreciation expense is $1,750.

Step-by-step solution

Meaning of Revaluation

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

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Jan. 1, 2016	Equipment	12,000
	Cash		12,000
Dec. 31, 2016	Depreciation Expense	2,000
	Accumulated Depreciation Equipment		2,000

(b) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2017	Depreciation Expense	2,000
	Accumulated Depreciation Equipment		2,000
Dec. 31, 2017	Accumulated Depreciation-Equipment	4,000
	Loss on Impairment	1,000
	Equipment		5,000

Working notes:

Calculation of the value of the equipment:

Equipment = Cost of equipment - Fair Value

= $12,000 - $7,000

=$5,000

(c) Calculating depreciation expense for 2018         

The depreciation expense of equipment for 2018 is $1,750.

Working notes:

Calculation of depreciation expense:

Depreciation expense = $\frac{\mathrm{Cost}\mathrm{of}\mathrm{asset}-\mathrm{Salvage}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}$

= $\frac{\$12,000-\$5,000}{4}$

= $1,750