Question

2.12 Effect of Valuation Method for Nonmonetary Asset on Balance Sheet and Income Statement. Assume Walmart acquires a tract of land on January 1, 2009, for $100,000 cash. On December 31, 2009, the current market value of the land is $150,000. On December 31, 2010, the current market value of the land is $120,000. The firm sells the land on December 31, 2011, for $180,000 cash. LO 2-2, LO 2- REQUIRED Ignore income taxes. Indicate the effect on the balance sheet and income statement of the pre ceding information for 2009, 2010, and 2011 under each of the following valuation methods (Parts a-c) mg. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some thind party content may be suppressed from the eBook andlor eChapter(s). Editorial review)h suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if wubeequent rights restrictions require it. CHAPTER 2 Asset and Liability Valuation and Income Recognition a. Valuation of the land at acquisition cost until sale of the land (Approach 1) b. Valuation of the land at current market value but including unrealized gains and losses in accumulated other comprehensive income until sale of the land (Approach 2) c. Valuation of the land at current market value and induding market value changes each year in net income (Approach 3) d. Why is retained earnings on December 31, 2011, equal to $80,000 in all three cases despite the reporting of different amounts of net income each year?

Answer 1

Solution 1) Land has to be valued at cost of acquisition for $100,000 initially, and remain constant through 2011. In 2011, Walmart will recognize a gain for $80,000 ($180,000 - 100,000) on the income statement when the building is sold for $180,000 2) Year 2011 Particulars Year 2009 Year 2010 Dr Dr Cr Dr Cr Cr Cash 100,000 180,000 Land 120,000 100,000 Gain on land 50,000 Loss on land 30,000 Year -2009 Year - 2010 Year 2011 Particulars Dr Cr Dr Cr Dr Cr Cash 100,000 Land 150,000 30,000 Gain on sale of land 60,000 Unrealized gain - OCI Unrealized loss - OCI 4) Over sufficiently long time periods the net income is computed as cash inflows minus cash outflows. In 2009 Walmart acquired the land for $100,000 and in 2011 it was sold for $180,000. Therefore, the net income total effect through the realization of the rise in the value of the land bought and sold equals $80,000. All the three different methods of valuation of asset and income measurement recognize the amount of $80,000 over time in different patterns, however the total remains constant