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The question is as follow:
A company purchased an asset on 1 January 20X3 at a cost of $1,000,000. It is depreciated over
50 years by the straight line method (nil residual value), with a proportionate charge for depreciation in
the year of acquisition and the year of disposal. At 31 December 20X4 the asset was re-valued to
$1,200,000. There was no change in the expected useful life of the asset.
The asset was sold on 30 June 20X5 for $1,195,000.
What profit or loss on disposal of the asset will be reported in the statement of profit or loss of the
company for the year ended 31 December 20X5?
A Profit of $7,500
B Profit of $235,000
C Profit of $247,500
D Loss of $5,000According to revision kit the correct answer here is A – 7,500. I can’t understand why revaluation surplus is not charged to disposal account / P&L. If you see the example in study text “6.8 Example: disposal of a revalued asset” the answer is different – the revaluation surplus has to be charged to disposal account / P&L. Is there any logic here because according to my opinion the question are exactly the same but the answers are different?
Thank you in advance! : )
The profit or loss on disposal of an asset is always the difference between the carrying value (net book value) and the sale proceeds.
The balance on the revaluation account is transferred to retained earnings, but does not appear in the Statement of profit or loss.
The answer in the Revision Kit is correct, but I cannot comment on the example in the Study Text because I do not have the Study Text.
(In future, please do not type out questions from the Revision Kit because of copyright issues. I have the Revision Kit and so all you need to is tell me the number of the question 🙂
Also, do watch my free lectures – they are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well )I don’t know how to show you the example in Study Text if i can’t type it. The transaction there is:
Dt Revaluation surplus
Ct Disposal AccountIt’s ridiculous to have wrong example in the Study text but obviously..I searched also in IAS 16 but there is no example. This case will be interesting about taxation view point because of income tax expenses. Is this temporary difference and the profit has to be increase with the amount of revaluation surplus when the assets is sold.
I now that this question is beyond F3 but it is interesting.The entry you have typed does not make sense to me without having the full question in front of me. If it is all as you have written then it does seem to be wrong.
With regard to tax, you are correct in saying that it is irrelevant for F3. However, the profits for tax purposes are adjusted anyway for all sorts of reasons – the tax is not based on the profits that are showing in the financial statements. (You will find all about this when you take Paper F6 🙂 )
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