QUESTION:  XYZ Ltd. has a building that cost $500,000 and has been depreciated using the straight-line method over 20 years with no residual value. The building is still in use and has a remaining useful life of 10 years. The company's management believes that the fair value of the building is now $800,000. How should the building be measured and what would be the journal entry?

Solution: The building should be measured at fair value, which in this case is $800,000. Since the building is still in use and has a remaining useful life, the fair value is not a relevant measure of its value. Therefore, the building should be measured using the cost model. The carrying amount of the building is $250,000 ($500,000 - accumulated depreciation of $250,000). The fair value of the building is $800,000, resulting in a revaluation surplus of $550,000 ($800,000 - $250,000). The journal entry is as follows:

Building (asset) $550,000 Revaluation surplus (equity) $550,000

Correction: In the initial calculation, the carrying amount of the building is incorrect. The carrying amount should be $250,000 ($500,000 / 20 years x 10 years = $250,000).

NOTE: The building should be measured using the cost model, as the fair value is not a relevant measure of its value. The carrying amount of the building is $250,000 ($500,000 / 20 years x 10 years = $250,000). However, the company's management believes that the fair value of the building is now $800,000. Since the fair value is higher than the carrying amount, a revaluation is necessary to recognize the increase in value. The revaluation surplus is $550,000 ($800,000 - $250,000). The journal entry is as follows:

Building (asset) $550,000

Revaluation surplus (equity) $550,000