Question

Hilo Company has land that cost \(350,000 but now has a fair value of \)500,000. Hilo Company decides to use the revaluation method specified in IFRS to account for the land. Which of the following statements is correct?

1. Hilo Company must continue to report the land at \(350,000.
2. Hilo Company would report a net income increase of \)150,000 due to an increase in the value of the land.
3. Hilo Company would debit Revaluation Surplus for \(150,000.
4. Hilo Company would credit Revaluation Surplus by \)150,000.

Short answer

The correct option is option (d): Hilo Company would credit Revaluation Surplus by $150,000.

Step-by-step solution

Meaning of Fair Value

According to a company's financial statement, a fair value represents the estimated value of its assets and liabilities. Fair market value refers to an item's sale value that is fair for both buyers and sellers. In other words, it is the “potential price” of an asset or debt rather than its historical price or market value.

Explaining the correct option

The fair value of the land is $500,000, and the cost of the land is $350,000. So, the revaluation surplus would be $150,000.

Working notes:

Revalution = Fair value of land - Cost of the land

= $500,000 - $350,000

= $150,000

Thus, the correct thing for Hilo Company to do is to credit Revaluation Surplus by $150,000.

Explaining the incorrect options

Option (a): There is a revaluation surplus of $150,000. So, reporting land on $350,000 is a wrong appropriation by Hilo Company.

Option (b): In the accounting book of Hilo Company, there is a fair value of land, and the cost of the land is mentioned as well. So, the revaluation value should be ascertained for the accurate value of the asset.

Option (c): The fair value of the land is greater than the cost of the land, so there would be a credit revaluation surplus of $150,000.