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Hi,
I am looking for confirmation to what happens to the Revaluation account when an asset is sold. I thought the balance is cleared to zero with the double entry going to the Disposal account. Can you please confirm?
Also the below question is in a revision pack and i believe the answer they have provided is wrong. The questions is:
“Company purchased an asset on 01/01/03 at a cost of £1,000,000.00. It is depreciated over 50 years by the straight line method, with proportionate charge for depreciation in the year of acquisition and year of disposal. at 31/12/04 the asset was re-valued to £1,200,000.00. There was no change in the useful life.
The asset was sold on 30/06/05 for £1,195,000. What profit on disposal of asset be reported in the statement of profit or loss for the year ended 31/12/05”
I think the answer should be £247,500
In the Statement of profit or loss itself, the profit on disposal is the difference between the sale proceeds and the carrying value (net book value) based on the revalued amount.
You are indeed correct that any balance on the revaluation reserve may be removed, but if they do remove it then it is directly to the Retained earnings and not in the Statement of profit or loss. (The transfer to retained earnings (or revenue reserve) will appear in the Statement of changes in equity, not in the SOPL itself.)
Thank you for your reply John.
From your first paragraph then the answer to the question should be £247,500 and not £7,500 as stated in the book. Can you please confirm?
Thanks
Ignore me, the carrying value of the revalued asset is £1,187,500, sold for £1,195,000 therefore profit of £7,500.00
Sorry to have wasted your time
hi
I’m really sorry to disturb you..but please may you explain to me how the carrying value of the revalued asset is £1,187,500?
It is the revalued amount less 6 months deprecation up to the date of the sale.
Guys one this after disposal, how is it that the revaluation reserve is transferred to Retained earnings, what would be the offset in the assets side. Cash will match the profit on the sale and the removal of asset l. But the reserve transferred to Retained Earnings will amount extra on the equity and liability
Why should there be an offset in the asset side????
Retained earnings and the revaluation reserve are both reserves and are both owing to the shareholders. Transferring the revaluation reserve to retained earnings does not change the total reserves but simply mean that they are all now distributable as dividends.
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.
Hey John,
I meant if we have sold the asset and removed it, then what will match the revaluation surplus is the cash we recieved and the gain. It still wouldnt match whatever is left in the surplus
The revaluation surplus does not arise because of having sold the asset, it arose when the asset was previously revalued.
When the asset is sold, the profit on sale is the difference between the cash received and the carrying value.
Again, have you watched my free lectures on non-current assets?
When we revalue we need to remove the existing depreciation and so we debit the accumulated depreciation and credit the revaluation account.
I do suggest that you watch 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.
Dear lecturer Moffat,
I just wanted to thank you for your efforts, I had some same questions and you answered them all.
Respect,
Ameera.
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