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if an asset is disposed off on the last day of the period, do we charge the depreciation for the year in the sopl?
It depends entirely on the company’s policy! “A full year in the year of purchase and none in the year of sale”? No depreciation even though it’s the last day of the accounting year when we sell it.
If the policy is “Depreciate at the rate of 20% per annum” (rather than at 20% per annum) then depreciation will be calculated on a pro rata basis and, in your example, it would have a full year’s depreciation.
But why bother? Whether we do or we don’t depreciate in the year of sale has no affect on profit for the year! If we don’t depreciate, then profit (or loss) on disposal will be higher (or lower) than if we do depreciate by exactly the amount of the depreciation
This is an F3 topic 😉
thanks!
my question was related to a problem in kaplan. at the end it asked for “how should the disposal on the previously revalued asset treated in the financial statements for the year ended 31 dec x6”
so, i have to show all effects.
the problem is as follows:
“D purchased property costong 750000 on 1-jan x4 with a useful life of 10 years. it has no residual value. at 31 dec x4 the prop was revalued at 810000 resulting ina gain of 135000, recorded in other comp income. there was no change in useful life. D does not make a transfer to realize profits in respect of excess depreciation on revalued assets.
on 31 dec x6 the property was sold for 900000.”
all my workings are correct, ie. the numbers.
the answer only shows the transfer entry from reval surplus to retained earnings.
i think the the SOPL must also show depreciation (no policy stated in question) ? and the sale proceeds?
As stated, there’s no point in depreciating in the year of sale.
There’s no way that proceeds of asset sale will be shown in a statement of profit or loss
So, no entry in statement of profit or loss other than the profit on the disposal and the transfer from revaluation reserve to retained earnings
“full depreciation for the year of purchase and no depreciation for the year of disposal”
Is this policy agree with the IAS 16 ?
If we do not depreciate it in the year of disposal we technically do not match our expenses with its benefits consumed.
If we do depreciate full in the year we expense for something that we did not consumed?Please explain?
Hi,
Yes, it is up to the company how they wish to estimate the depreciation. The standard required that we depreciate the asset using a suitable method (straight line/reducing balance) but the company can then choose a consistent policy it then adopt with regards to what it does in the year it acquires/disposes of the asset.
You are right that we could expense something where we have not received the benefit but the amounts involved are immaterial and so would not impact the overall performance shown within the financial statements.
Thanks
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