Jivraj and Juma are accountants at Desktop Computers. Desktop Computers has not adopted the revaluation model for accounting for its property, plant, and equipment. The accountants disagree over the following transactions that occurred during the fiscal year ended December 31, 2017:

1. Desktop purchased equipment for $60,000 at a going-out-of-business sale. The equipment was worth $75,000. Jivraj believes that the following entry should be made:

2. Land costing $90,000 was appraised at $215,000. Jivraj suggests the following journal entry:

3. Depreciation for the year was $18,000. Since the company's profit is expected to be lower this year, Jivraj suggests deferring depreciation to a year when there is a higher profit.
4. Desktop bought a custom-made piece of equipment for $54,000. This equipment has a useful life of six years. Desktop depreciates equipment using the straight-line method. "Since the equipment is custom-made, it will have no resale value," Jivraj argues. "So, instead of depreciating it, it should be expensed immediately." Jivraj suggests the following entry:

5. Jivraj suggests that the company building should be reported on the balance sheet at the lower of cost and fair value. Fair value is $15,000 less than cost, although it is expected to recover its value in the future.
6. On December 20, 2017, Desktop hired a marketing consultant to design and implement a marketing plan in 2018. The plan will be designed and implemented in three stages. The contract amount is $60,000, payable in three instalments in 2018 as each stage of the plan is completed. Jivraj argues that the contract must be recorded in 2017 because there is a signed contract. Jivraj suggests the following:

Instructions
(a) For each transaction, indicate why Juma disagrees. Support your answer with reference to the conceptual framework (definition of elements, qualitative characteristics, assumptions, constraints, and recognition and measurement criteria).
(b) Prepare the correct journal entry to record each transaction.
TAKING IT FURTHER
How would your response in part (a) differ if Desktop adopted the revaluation model of accounting for its property, plant, and equipment?

Transcribed Image Text:

Equipment 75,000 Cash Gain on Fair Value Adjustment of Equipment 60,000 15,000 Land 125,000 Gain on Fair Value Adjustment of Land 125,000 Miscellaneous Expense 54,000 Cash 54,000 Advertising Expense Accounts Payable 60,000 60,000