Intermediate Accounting, Volume 1,
5th Canadian Edition by Kin Lo
Complete Chapter Solutions Manual
are included (Ch 1 to 10)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
1.Fundamentals of Financial Accounting Theory
2.Conceptual Frameworks for Financial Reporting
3.Accrual Accounting
4.Revenue Recognition
5.Cash and Receivables
6.Inventories
7.Financial Assets
8.Property, Plant, and Equipment
9.Intangible Assets, Goodwill, Mineral Resources, and Government
Grants
10.Applications of Fair Value to Non-Current Assets
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch10-1)
Chapter 10
Applications of Fair Value to Non-Current Assets
L. Problems
P10-1. Suggested solution:
a. Benefits of using the revaluation model to subsequently measure real estate assets
include:
A more relevant balance sheet. The land and building are reported at fair value, which is
more useful to most users than the assets’ historical cost. This improves both the
predictive value and confirmatory value of the balance sheet.
A more comparable balance sheet as assets acquired in different time periods remain
comparable as the fair value of the asset includes the effects of factors like inflation and
obsolescence, whereas the historical cost of the asset does not.
The change in the value of the real estate assets is reported in comprehensive income (net
gains in OCI, net losses in profit or loss), which provides many stakeholders with a
clearer view of the company’s economic, or “real” profit for the period, versus
accounting income under the historical cost model.
More meaningful select financial ratios. When real-estate assets are reported at historical
cost, their subsequent change in value is not captured in either the asset valuation or
equity, or for that matter, reported comprehensive income. Assume for a moment that a
company that subsequently measures its real-estate assets at historical cost reports
earnings of $100,000 and equity of $1,000,000. Its ROA is $100,000 / $1,000,000 =
10.0%. Further assume that the fair value of its real-estate holdings was $500,000 higher
than its carrying cost, with the increase having occurred in past years. Its economic ROA
is $100,000 / $1,500,000 = 6.7%, which would be readily evident if the company used
the revaluation model. The 6.7% figure is more meaningful to many stakeholders
including existing shareholders and potential investors, as it more faithfully represents the
actual economic returns earned by the company.
b. Drawbacks of using the revaluation model to subsequently measure real estate assets
include:
The reported balance sheet values are less reliable than those reported at historical cost. It
remains that however frequently revaluations are undertaken, that the reported values are
usually estimates of some sort, e.g. appraisals, whereas the only way to establish the
assets’ actual value is to sell it in an arms-length transaction between two parties with no
compulsion to act. Historical cost information is thus more representationally faithful as
it is both free from error, and more verifiable.
There is a financial cost to using the revaluation model as the assets fair value must be
regularly determined. In many cases this involves paying an outside party to prepare the
10-1
, ISM for Lo/Fisher, Intermediate Accounting, Vol. 1, Fifth Edition
valuation. Internally prepared evaluations are not costless either, as they use company
resources that could be deployed elsewhere.
Reporting changes in fair value in the statement of comprehensive income, introduces
additional volatility in the reported comprehensive income unrelated to the company’s
principal operations. This in turn diminishes the comparability of this metric. Moreover,
cumulative gains are reported in other comprehensive income and accumulated other
comprehensive income whereas cumulative losses are reported in net income and
retained earnings. This asymmetrical accounting treatment reduces the understandability
of the financial statements.
P10-2. Suggested solution:
Dr. Land 250,000
Cr. Other comprehensive income–revaluation gain 250,000
P10-3. Suggested solution:
Dr. Loss on land revaluation 100,000
Cr. Land 100,000
P10-4. Suggested solution:
Dr. Land ($1,100,000 – 600,000) 500,000
Cr. Gain on land revaluation* 400,000
Cr. OCI – revaluation gain* 100,000
* Gain of $500,000 recorded through net income for amount up to original cost. Amount above
cost goes to other comprehensive income (OCI).
P10-5. Suggested solution:
Dr. OCI – revaluation loss 250,000
Dr. Loss on revaluation 200,000
Cr. Land ($800,000 – $1,250,000) 450,000
* Loss of $250,000 recorded through OCI for amount down to original cost. Amount below cost
goes through net income.
10-2
5th Canadian Edition by Kin Lo
Complete Chapter Solutions Manual
are included (Ch 1 to 10)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
1.Fundamentals of Financial Accounting Theory
2.Conceptual Frameworks for Financial Reporting
3.Accrual Accounting
4.Revenue Recognition
5.Cash and Receivables
6.Inventories
7.Financial Assets
8.Property, Plant, and Equipment
9.Intangible Assets, Goodwill, Mineral Resources, and Government
Grants
10.Applications of Fair Value to Non-Current Assets
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch10-1)
Chapter 10
Applications of Fair Value to Non-Current Assets
L. Problems
P10-1. Suggested solution:
a. Benefits of using the revaluation model to subsequently measure real estate assets
include:
A more relevant balance sheet. The land and building are reported at fair value, which is
more useful to most users than the assets’ historical cost. This improves both the
predictive value and confirmatory value of the balance sheet.
A more comparable balance sheet as assets acquired in different time periods remain
comparable as the fair value of the asset includes the effects of factors like inflation and
obsolescence, whereas the historical cost of the asset does not.
The change in the value of the real estate assets is reported in comprehensive income (net
gains in OCI, net losses in profit or loss), which provides many stakeholders with a
clearer view of the company’s economic, or “real” profit for the period, versus
accounting income under the historical cost model.
More meaningful select financial ratios. When real-estate assets are reported at historical
cost, their subsequent change in value is not captured in either the asset valuation or
equity, or for that matter, reported comprehensive income. Assume for a moment that a
company that subsequently measures its real-estate assets at historical cost reports
earnings of $100,000 and equity of $1,000,000. Its ROA is $100,000 / $1,000,000 =
10.0%. Further assume that the fair value of its real-estate holdings was $500,000 higher
than its carrying cost, with the increase having occurred in past years. Its economic ROA
is $100,000 / $1,500,000 = 6.7%, which would be readily evident if the company used
the revaluation model. The 6.7% figure is more meaningful to many stakeholders
including existing shareholders and potential investors, as it more faithfully represents the
actual economic returns earned by the company.
b. Drawbacks of using the revaluation model to subsequently measure real estate assets
include:
The reported balance sheet values are less reliable than those reported at historical cost. It
remains that however frequently revaluations are undertaken, that the reported values are
usually estimates of some sort, e.g. appraisals, whereas the only way to establish the
assets’ actual value is to sell it in an arms-length transaction between two parties with no
compulsion to act. Historical cost information is thus more representationally faithful as
it is both free from error, and more verifiable.
There is a financial cost to using the revaluation model as the assets fair value must be
regularly determined. In many cases this involves paying an outside party to prepare the
10-1
, ISM for Lo/Fisher, Intermediate Accounting, Vol. 1, Fifth Edition
valuation. Internally prepared evaluations are not costless either, as they use company
resources that could be deployed elsewhere.
Reporting changes in fair value in the statement of comprehensive income, introduces
additional volatility in the reported comprehensive income unrelated to the company’s
principal operations. This in turn diminishes the comparability of this metric. Moreover,
cumulative gains are reported in other comprehensive income and accumulated other
comprehensive income whereas cumulative losses are reported in net income and
retained earnings. This asymmetrical accounting treatment reduces the understandability
of the financial statements.
P10-2. Suggested solution:
Dr. Land 250,000
Cr. Other comprehensive income–revaluation gain 250,000
P10-3. Suggested solution:
Dr. Loss on land revaluation 100,000
Cr. Land 100,000
P10-4. Suggested solution:
Dr. Land ($1,100,000 – 600,000) 500,000
Cr. Gain on land revaluation* 400,000
Cr. OCI – revaluation gain* 100,000
* Gain of $500,000 recorded through net income for amount up to original cost. Amount above
cost goes to other comprehensive income (OCI).
P10-5. Suggested solution:
Dr. OCI – revaluation loss 250,000
Dr. Loss on revaluation 200,000
Cr. Land ($800,000 – $1,250,000) 450,000
* Loss of $250,000 recorded through OCI for amount down to original cost. Amount below cost
goes through net income.
10-2
