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Hi fellows can someone please explain to me why profit on disposal was not included in the statement of comprehensive income in BPP practice kit question 6.
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Included in sales revenue is $300,000 being the proceeds of an item of plant that was sold in January20x5. The plant had originally cost $900,000 and had been depreciated by $630,000 at the date of sale. Other than recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant has been made.
This rather a long question, so cannot reproduce the whole question.
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here rectify the entry by Dr Sales Revenue and Cr TNCA ( PLANT) with the value of $300,000
reason behind above entry actually you recordedCASH dr. $300,000
TNCA Plant cr. $300,000but you wrongly record as
CASH dr. $300,000
Sales Revenue cr. $300,000so eliminate Sales revenue by Debiting and crediting Asset
you earn a profit on disposal $ 30,000 (900 – 630 = 270 ) Cash 300 – 270 = 30
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thanks buddy but in the model answer the 30k was not brought in. And in a related question the profit was added in the I/S.
@jewdimond said:
here rectify the entry by Dr Sales Revenue and Cr TNCA ( PLANT) with the value of $300,000
reason behind above entry actually you recordedagree
CASH dr. $300,000
TNCA Plant cr. $300,000but you wrongly record as
CASH dr. $300,000
Sales Revenue cr. $300,000so eliminate Sales revenue by Debiting and crediting Asset
you earn a profit on disposal $ 30,000 (900 – 630 = 270 ) Cash 300 – 270 = 30
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hi Werty,
I understand that the profit is 30k and revenue is less by the 300K, the proceeds of the disposal.Cost of sale is less by 30K the profit. So I thought it was going to be brought in after gross profit (other income- profit from disposal). have a look at question 12 it’s the same principle- a loss in this case. I know the journal but really cannot understand whats going on. Can someone pls help? Explain how is the 30k included in the cost of sale.The 30 is a deduction from the cost of sales. Is your question really “How is the 30k included in the cost of sale?” or should your question be “Why is the …..?”
If your question is “Why?” the answer is that a profit / loss on disposal of an asset is really an adjustment necessary because of over / under depreciation in the past. Where that earlier depreciation has been charged against profits through the cost of sales figure, then the adjustment for over / under depreciation should also go through cost of sales.
If your question really is “How?” the answer is simply by deducting the 30 in arriving at the adjusted cost of sales figure. You can see that in working 1 in the revision kit at the bottom of page 106
Hope that helps
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Thanks Werty,
but can you elaborate a bit more. 300 was deducted from revenue and since the NBV of the plant was 270, profit equals 30. the rest I do not understand how is the 30 included after deducting it. I am really confused. I you could spare the time we could talk over it on MSN. I will be online tomorro at 1800hrs UK time.
Either way thanks for the concern.So far, the company has Dr Cash and Cr Revenue. And you accept that this is incorrect.
The correct entry would be to dispose of the asset through a Disposals account and take the balancing figure from the disposal account to the statement of Income.
So, reverse the bad entry – Dr Revenue Cr cash. That gets us to a position where NO entries have now been made to reflect this transaction.
Now, Dr Disposals Cr TNCA account with the 270 net book value
Then Dr Cash Cr Disposals with the 300 proceeds
And finally, balance off the Disposals account and take the missing / balancing figure of 30 to the Statement of Income
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wery,
Thank you so much I finally got it. Thanks really helpful.
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