Revaluation Model and Income Statement Impact: Crane Inc. Case Study

What is the impact on Crane Inc.'s income statement due to the decrease in the property's fair value?

A. $12,400 loss

B. $9,920 gain

C. $2,480 loss

D. $9,920 loss

Answer:

The correct answer is D. $9,920 loss.

Crane Inc. experienced a $12,400 decrease in the property's fair value. After eliminating the existing revaluation surplus of $2,480, the remaining $9,920 loss is recognized in the income statement, leading to the correct answer option D: $9,920 loss.

The question relates to the revaluation model for fixed assets under International Accounting Standards (IAS 16), where a company can choose to revalue its fixed assets to their fair value at the date of the revaluation. The student is presented with a scenario where Crane Inc. has experienced a decrease in the fair value of property between December 31, 2023, and December 31, 2024.

Step 1: Calculate the decrease in the fair value of the property: The fair value decreased by $12,400.

Step 2: Understand the revaluation surplus before adjustment: The revaluation surplus account had a balance of $2,480 before any adjustments.

Step 3: Determine the impact on the income statement: Since the decrease in fair value ($12,400) is greater than the existing revaluation surplus ($2,480), the loss that exceeds the surplus will be recognized in the income statement. Therefore, the revaluation surplus is written off first against the loss.

Step 4: Calculate the loss recognized in the income statement: The total loss is $12,400; the revaluation surplus of $2,480 is eliminated, resulting in a remaining loss of $12,400 - $2,480 = $9,920, which will be recognized in the income statement.

Hence, the correct option is D: $9,920 loss.