Questions 7 through 10 are based on the following information:
Tongas Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.
-The journal entry to adjust the plant assets to fair value and record revaluation surplus in year one will include a

Question

Quizplus · Accepted Answer

In revaluation accounting, when the fair value of an asset is lower than its carrying value, the asset is written down to its fair value and the difference is recorded as a loss. However, when the fair value of an asset is higher than its carrying value, the asset is revalued and the difference is recorded as a revaluation surplus in equity. In this case, the fair value of the plant asset is lower than its carrying value, so the asset is written down to $1,500,000 (a decrease of $100,000). This means that the journal entry will include a credit to Plant Assets for $1,500,000 and a debit to Accumulated Depreciation for $100,000. In addition, since the asset is being revalued, a credit must be made to Revaluation Surplus for the difference between the carrying value and the fair value ($100,000). Therefore, the journal entry will include a credit to Revaluation Surplus for $100,000. Choice D is correct.

Questions 7 Through 10 Are Based on the Following Information