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Another question from the BPP revision kit.
Company’s building had a carrying amount of $400 at 1 January 2004 and 30 years life remaining. It was revalued at that date to $600 with no change to useful life.
On 1 Jan 2006 it was sold for $450. What should be charged to profit and loss as a loss on disposal.
New depreciation is 600/30= 20. After two years carrying value is 560 so loss is 110.
———————–
The answer is no loss is to be charge to the P&L. The shortfall of 110 will be set against the 200 held in the revaluation surplus. The 90 balance is transferred to retained earnings on disposal.
———————————-I was under the assumption that we charge the 110 to the P&L (which will then be reflected in the retained earnings as it will decrease that years profit)
At the same time remove the 200 from the revaluation surplus to retained earnings so together now in we get the 90 balance.
The BPP answer is correct, because there was no loss by reference to the original cost.
This topic is slightly confusing me. An example in Chapter 8 from the Kaplan text states:
Tiger Trees owns and runs a golf club. Some years ago the entity purchased land next to the existing course with the intention of creating a smaller course. The cost of the land was $260. Over time the entity had the land revalued to $600. It has now decided that building the course is uneconomical and has sold the land for $695.
What are the entries required to reflect the disposal?
Answer:
Transfer the 340 from revaluation surplus to retained earningsThe Disposals Account:
Debit Land 600
Debit Gain on disposal 95
Credit Cash 695
Note that the gain on disposal is included in the statement of profit or loss in arriving at profit for the year.
————————————–Are we supposed to account differently if its a ‘loss’ on the revalued value?
Both of the answers are correct.
The reason is that in both cases the profit of revaluation went to the revaluation reserve.
In the second question it was sold for an even greater profit and so the extra 95 goes to the SOPL and the balance of 340 on the revaluation reserve is released and goes to retained earnings.
In the first question, because there is a loss the loss is charged to the SOPL and then the balance on the revaluation reserve it released.
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