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The sale of any NCA is considered a capital income – That’s clear.
What I’m confused about is the profit/loss on such transactions. If the proceeds from the sale (of NCA) is a capital income, then is the profit/loss (only) an item of revenue income?
For instance, in a question, it asked if the following was RI or CI:
‘Profit on the sale of an office building’
The answer was: ‘Capital income (net of the costs of sale)’
How come? Should the PROFIT not be RI? Kindly shed light on this matter for I am utterly confused. The issue is that I distinctly recall being taught (in FA1 etc) that all the proceeds from such sales were CI but the profits/losses made were RI. Was this incorrect?
The sale for an NCA is not capital income – I don’t know where you read that but it is nonsense!! There is no such thing as ‘capital income’ 🙂
The profit or loss on sale occurs because either we have charged too much or too little depreciation. Obviously depreciation is charged based on what we expect, but had we known the final sale price of the asset it would have been different.
Because it is extremely unlikely that the depreciation will end up having been the ‘correct’ amount, we end up with a profit or loss on sale. This appears always on the Statement of profit or loss because it a really just a correct of the depreciation charge.
I really do suggest that you watch our free lectures (in number order). They are a complete course for Paper F3 and cover everything you need to be able to pass the paper well.
Thank you for clarifying that up! So if there is no profit/loss on sale of a NCA, it means that the estimated depreciation/useful life/residual value were spot-on? Is that correct?
Yes, I will take a look at the lectures.
As for the ‘capital income’ etc, I read that in the BPP study text. I’ll quote it:
“Capital income and revenue income:
Capital income is the proceeds from the sale of non-trading assets (ie proceeds from the sale of non-current assets, including long-term investments). The profits (or losses) from the sale of non-current assets are included in the income statement of a business, for the accounting period in which the sale takes place. For instance, the business may sell vehicles or machinery which it no longer needs – the proceeds will be capital income.
Revenue income is income derived from the following sources.
(a) The sale of trading assets, such as goods held in inventory
(b) The provision of services
(c) Interest and dividends received from investments held by the business.”I have another question, if you may address it please.
Would you capitalise a 1-year warrantee as part of the cost of a NCA?
Your first sentence is correct it would mean that the depreciation was spot on (although obviously that is very unlikely 🙂 )
OK – I know what BPP mean, but we do not use the expression capital income.
Whenever we refer to income we always mean revenue income.
With regard to the warranty, it actually would be very unusual to have to pay for a one-year warranty – certainly within the EU it has to be given free of charge by law.
However, if you do pay for a warranty then you would not capitalise it – you would treat it as an expense in the SOPL (in the same way as you would treat repair bills if there was no warranty). The only time you might capitalise it would be if there was no choice – if you had to pay for it as part of paying for the asset. I can’t imagine that ever being relevant in the exam, but in that case it would be treated as part of the cost of the asset.Epicly explained. I really appreciate it.
Warranties ride on the same bus as maintenance and other revenue items then? Even though a warranty was to be for the one year? (A question presented this ie a warranty for one year paid when the NCA was bought.) Does the fact a warranty is for 1-year even make a difference?
Thanks once more.
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