Shuswap MTQ – Preparing Basic Financial Statements

I can’t understand the second task of BPP Exam kit MTQ 19.1.

19.1 Shuswap

The draft statement of financial position shown below has been prepared for Shuswap, a limited liability
company, as at 31 December 20X4:
Accumulated Carrying
Cost depreciation value
$’000 $’000 $’000
Assets Non-current assets Land and buildings 9,000 1,000 8,000
Plant and equipment 21,000 9,000 12,000
30,000 10,000 20,000
Current assets Inventories 3,000
Receivables 2,600
Cash at bank 1,900
Total assets 27,500
Equity and liabilities
Equity Issued share capital (ordinary shares of 50c each) 6,000
Retained earnings 12,400
Non-current liabilities
Loan notes (redeemable 20Y0) 2,000
Current liabilities
Trade payables 2,100
22,500
Suspense account 5,000
27,500

Task 2
The suspense account is made up of two items:
(a) The proceeds of issue of 4,000,000 50c shares at $1.10 per share, credited to the suspense account
from the cash book.
(b) The balance of the account is the proceeds of sale of some plant on 1 January 20X4 with a carrying
amount at the date of sale of $700,000 and which had originally cost $1,400,000. No other
accounting entries have yet been made for the disposal apart from the cash book entry for the receipt of
the proceeds. Depreciation on plant has been charged at 25% (straight line basis) in preparing the draft
statement of financial position without allowing for the sale. The depreciation for the year relating to the
plant sold should be adjusted for in full.

I don’t understand how the sale proceeds and loss is worked out.

Answer

There is $100,000 loss on disposal.
$’000
Carrying amount 700
Proceeds (5,000,000 – (4,000,000 × $1.10)) (600)
Loss 100
The depreciation adjustment is $350,000 (1,400,000 × 25%)