Indigo inc. owns land that it purchased on january 1, 2000, for $418,200. at december 31, 2017, its current value is $679,700 as determined by appraisal. at what amount should mickelson report this asset on its december 31, 2017, balance sheet?

$679,700

Explanation:

I believe Mickelson is the person preparing the books for Indigo Inc.

This question tests your knowledge of revaluation and its application to financial statements. It indirectly checks your knowledge of depreciation also.

A quick definition of terms would make it clearer.

Depreciation is the systematic allocation of the price of an asset over its useful life. That is once an asset (non-current) is purchased, it cannot be used up immediately in one financial year, hence accountants usually want to spread the use of the asset and match it with whatever revenue they get from the use of the asset (an application of prudence concept).

But land does not depreciate, rather it appreciates over time. Due to the fact that land appreciates over time, it would be misrepresentation on the part of Mickelson to report the value of the asset in December 2017 at the price in which the land was purchased in 2000.

Because land appreciates over time, a revaluation is more appropriate. this revaluation compares the carrying value of the land with the fair value on the land as at the date of revaluation (comparing $418,200 with $679,700) and the higher is used.

Hence to faithfully represent the current details of the status of the land, the IFRS (International Financial Reporting Standards) states that the entity should record the value of land at fair value.

I hope this is clear and easy to understand.

Other concepts you might want to check out are;

depreciation

carrying amount

revaluation surplus

fair value

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