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Question:
Which of the following best describes the gain or loss on the disposal of a non-current?A) The amount by which management over or under charged depreciation for the asset.
B The extent to which the asset’s underlying value changed during its useful life.
C) The correction of forecasting errors when the asset’s useful life and residual values were estimated.
D) The remaining value after depreciation has been taken into account.The answer is C.
Sir can you make me explain that why other options are wrong and this is correct.
Thank you in advance.The gain or loss on disposal is the difference between the sale proceeds and the net book value (carrying value) of the asset.
As is common in the exam, 2 of the four answers are definitely wrong. 2 of the answers are correct but one of them is better than the other (which is what the question asks for).
D is definitely wrong because it is stating the net book value.
B is definitely wrong because it is not the change in value.
A is more or less correct in that had they charged the correct depreciation then there would be no gain or loss on disposal.
However C is the best description. The depreciation is always based on estimate of the useful life and residual value. Had the estimates been correct then there would be no gain or loss on disposal. However since the estimates are so unlikely to ever be correct, the gain or loss on disposal is correcting the total depreciation charged.
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