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Dear Sir,
I saw this question in BPP study text.
A non-current asset (cost $10,000, depreciation $7,500) is given in part exchange for a new asset
costing $20,500. The agreed trade-in value was $3,500. Which of the following will the statement of
profit or loss include?
A A loss on disposal $1,000
B A profit on disposal $1,000
C A loss on purchase of a newAnswer : B
Carrying amount at disposal (10,000 – 7,500) 2,500
Trade-in allowance 3,500
Profit 1,000Apologies if my answer sounds silly but my answer to this question was A as I was thinking the trade in is 3500. I only have 2500 in hands which means I have to fork out $1000 more to be able to afford the trade in. So, why is the 1000 considered as a profit and not a loss ?
Thank you, sir
They have an asset with a book value of 2,500.
The trade in value is what the buyer is paying for the asset. (Instead of actually giving them cash, they are reducing the price of a new asset by that amount).
Therefore they are selling an asset with a book value of 2,500 for 3,500 – therefore a profit of 1,000.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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