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Hi,
Can anyone explain to me, I have read the answer to question 5 in Question Bank of the Study Text (BBP) – Gains company1. The question mentioned “Asset held at cost were impaired by 25000”,
I didnt see the answer mention anything to this number, it means to me that “Asset held at cost” impaired was not taken to Profit and Lost iin this case,As I understand, from IAS 36, if Asset used the cost model, the impairment loss will be debited as an expense in P&L. If assets used revaluation model, the impairment loss will be treated as a revaluation decrease, reverse any previous credit in revaluation reserve of the same asset if any or if not then debited to the P&L.
2. The question mentioned “A previously revalued asset was sold for 60,000″
Details of revaluation are:
Book value 30000
Revaluation 50000
Total 80000
Depreciation (80000/10 *3) = 24000
NBV 56000″For me, when it was sold, the double book keeping entry should be
Dr accumulated Depreciation 24000
Dr Bank 60000 (assumed that the amount is received in cash)
Cr NCA 80000
Cr Other income 4000”However, the answer didnt take the 4000 in the P&L. Could you explain to me why?
Great thanks,
1 I can’t help you here, sorry. I don’t have the BPP study text available so, unless you tell me how the answer has treated it, I can’t explain the treatment but I would, on the face of it, agree with you that it should be impaired through the PorL account
2 What are you going to do with the revaluation surplus of $50,000 sitting in the Revaluation Reserve relating to this disposed asset? IF the company has been making an annual transfer out of Revaluation Reserve amounting to $5,000 per annum for the three years since revaluation, there should be $35,000 left in there that can now be released to retained earnings.
If it hasn’t made that annual transfer, then the full $50,000 can be released
Is there no mention of maybe $39000 (35,000 + 4,000) or of 54,000 (50,000 + 4,000) in the answer?
I’m batting blind here! Hope that helps you!
Thank you very much for your reply. I want to attach the image here but I cant so I will type everything here. Hope that you can help
Question:
Gains (Study text Question 7)
Required
Using the information below prepare for Gains Co for the year ended 31 December 20X9:
(a) the statement of recognised income and expense, and
(b) the statement of changes in equity.(a) Gains Co income statement extract
Profit before interest and tax 792
Finance income 24
Finance cost (10)
Profit before tax 806
Income tax expense (240)
Profit for the period 566(b) Non-current assets
(i) Assets held at cost were impaired by $25,000.
(ii) Freehold land and buildings were revalued to $500,000 (Book value $380,000).
(iii) A previously revalued asset was sold for $60,000.
Details of the revaluation are as follows:
Book value at revaluation 30,000
Revaluation 50,000
BV (after revaluation) 80,000
Depreciation (80,000/10) × 3) 24,000 = 56,000
Gains Co has been following paragraph 41 of IAS 16 which allows a reserve transfer of the realised revaluation surplus (the difference between depreciation based on revalued
amount and depreciation based on cost) as the asset is used to retained earnings.(iv) Details of investment properties are as follows:
Original cost 120,000
Revaluation surplus 40,000
Value at 1.1.20X9 160,000
The properties had a valuation on 31 December 20X9 of $110,000. Gains Co previously
accounted for its investment properties by crediting gains to a revaluation surplus as
allowed by local GAAP. Gains Co now wishes to apply the fair value model of IAS 40
which states that gains and losses should be accounted for in the income statement. The
elimination of the previous revaluation surplus is to be treated as a change in accounting
policy in accordance with IAS 8. No adjustment has yet been made for the change in
accounting policy or subsequent fall in value.(c) Share capital
During the year the company had the following changes to its capital structure.
(i) An issue of $200,000 $1 ordinary bonus shares capitalising its share premium reserve
(ii) An issue of 400,000 $1 ordinary shares (issue price $1.40 per share).(d) Equity
The book value of equity at the start of the year was as follows:Share capital 2,800,000
Share premium 1,150,000
Revaluation surplus 750,000
Retained earnings 2,120,000
Total 6,820,000
(e) Dividends
Dividends paid during the year amounted to $200,000.Answer (given by BBP)
(a) Statement of recognised income and expense
20X9
$’000
Gain on revaluation of properties 120
Net income recognised directly in equity 120
Profit for the period (566 – (W) 50) 516
Total recognised income and expense for the period 636
Note: The effect of the change in accounting policy would be shown at the foot of the comparative
statement of recognised income and expense (not required by the question).
Working
Loss on investment property (160 – 110) (50)
(b) Statement of changes in equity
Share Share Revaluation Retained Total
Capital Premium Surplus earningsBalance at 31 December 20X9:
Share capital: 2800 + 600 = 3400
Share premium: 1150 – 40 = 1110
Retained Earnings: 2120 + 40(from changes in acc policies) -200 (div) + 516 (profit for the year) + 35 (realisation of revaluation reserve) = 2511
Revaluation Reserve: 750 – 40(changes in acc policies) +120 -35 = 795Working:
1 Calculation of profit realised on sale of revalued asset
Revaluation recognised in past 50,000
Less: amounts transferred to retained earnings:
(80,000/10 – 30,000/10) × 3 (15,000) = 35,000
@Mike: They do realise 35000 to retained earnings, so I dont complain about it,
I just didnt see they take into account the 4 for other income and dont deduct the 25 for impairment loss of the assetsAnd my teacher told me that “Asset held at cost when impaired is not creditted to P&L”, so I was so confused.
#1 “An asset held at cost when impaired is not credited to PorL” Your teacher is absolutely correct – in fact, it’s not credited anywhere except in the asset account!
#2 The 4 profit on disposal and the 25 impairment are already accounted for within the year’s profits of 792!
That’s why you cannot see them in the BPP answer!
OK?
For asset held at cost, impairment will be charged to P/L right ? I didnt undertsand #1
Anu, correct. So the impairment will be DEBITED to profit or loss and not credited as proposed by Mik2202’s post
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