14. Entries on revaluation necessary to adjust property the depreciation of prior periods was credited clirectly to the asset account, the increase in value shown by the appraisal should be debited to the asset account; this would make it agree with the appraised value. The credit should be made to surplus account. If, however, the depreciation of prior periods was carried in a reserve account, the increase in the book value of the property should be effected by transferring as much of the excess as is necessary to offset the excess credit.
15. Value of fixed assets is not affected by eco nomic value of the fixed assets that a company uses in its operations is not affected by economic conditions. This principle applies also when the value of fixed assets declines, or when the cost of duplicating fixed assets is lower than the book value of the assets.
To illustrate, we will suppose that a company has in its equipment account a record of five engine lathes which cost $400 each, and on each of which depreciation, based upon the normal life of such ma chinery, has accrued to the amount of $100. The fact that lathes of this kind can now be purchased in the open market for $275 each, owing to the decline in material and labor cost, would not justify the com pany in reducing the value of the lathes upon its ledger. This is true so long as the lathes are serving
the purpose for which they were purchased, and so long as the depreciation rate is sufficient to take care of the amortization of the assets to residual value at the expiration of their effective life. This being the case, changes in value, that are the result of economic conditions should be ignored.
16. Entries to record increase due to economic causes.—It is not considered good accounting or financial practice to swell the surplus account with profit resulting from economic causes. If it is de sired to give expression to the fact that the fixed assets have increased in value because of economic changes, the amount of the increase should be cred ited to an account "Reserve for Appreciation," and not to the surplus account. Otherwise, stockholders would be misled into the belief that the dividends which they are receiving are a part of the earned sur plus. It is true, however, that a corporation may ' legally reflect such increased valuation in its surplus account, and by disposing of an amount of capital stock for cash, equivalent to the increase in value, it may distribute the cash in the form of a dividend, But even in this procedure, fairness to the stock holders requires that notice be given as to the source of the dividends.