revaluation surplus debited to the profit and loss

Hello Sir ,

In the following question they credited the revaluation surplus of the leasehold property to the cost of sales
I would like to ask:

Is it a rule to credit the surplus to p & l when we have debited the P&l previously because of the loss in revaluation

secondly if we revalue the asset for the first time and got a loss in revaluation where we will debit ,as per my thinking we will debit profit loss instead of other comprehensive income.

———–
The second problem is that there a plant bought to be used for the contract work ,now regarding depreciation of this plant where we have to debit in P&l or in cost of the contract.

In this question it was added to the cost to date of the contract in SFP only.

Please clarify Sir,

Thanks.

__________________________________________________________________________________

Q

The following trial balance relates to Pricewell at 31 March 20X9:
$000 $000
Leasehold property – at valuation 31 March 20X8 (note (i)) 25,200
Plant and equipment (owned) – at cost (note (i)) 46,800
Right?of?use assets – at cost (note (i)) 20,000
Accumulated depreciation at 31 March 20X8:
Owned plant and equipment

12,800
Right?of?use plant 5,000
Lease payment (paid on 31 March 20X9) (note (i)) 6,000
Lease liability at 1 April 20X8 (note (i)) 15,600
Contract with customer (note (ii)) 14,300
Inventory at 31 March 20X9 28,200
Trade receivables 33,100
Bank 5,500
Trade payables 33,400
Revenue (note (iii)) 310,000
Cost of sales (note (iii)) 234,500
Distribution costs 19,500
Administrative expenses 27,500
Equity dividend paid 8,000
Equity shares of 50 cents each 40,000
Retained earnings at 31 March 20X8 44,100
Current tax (note (iv)) 700
Deferred tax (note (iv)) 8,400
––––––– –––––––
469,300 469,300
––––––– –––––––

The following notes are relevant:
(i) Non?current assets:
The 15 year leasehold property was acquired on 1 April 20X7 at a cost of $30 million.
The accounting policy is to revalue the property at fair value at each year end. The
valuation in the trial balance of $25.2 million as at 31 March 20X8 led to an impairment
charge of $2.8 million which was reported in the statement of profit or loss and other
comprehensive income in the year ended 31 March 20X8 At 31 March 20X9 the
property was valued at $24.9 million.
Owned plant is depreciated at 25% per annum using the reducing balance method.
The right?of?use plant was acquired on 1 April 20X7. The rentals are $6 million per
annum for four years payable in arrears on 31 March each year. The interest rate
implicit in the lease is 8% per annum. Right?of?use plant is depreciated over the lease
period.
No depreciation has yet been charged on any non?current assets for the year ended
31 March 20X9. All depreciation is charged to cost of sales.
(ii) On 1 October 20X8 Pricewell entered into a contract to construct a bridge over a river.
The performance obligation will be satisfied over time. The agreed price of the bridge
is $50 million and construction was expected to be completed on 30 September 20Y0
The $14.3 million in the trial balance is:
$000
Materials, labour and overheads 12,000
Specialist plant acquired 1 October 20X8 8,000
Payment from customer (5,700)
––––––
14,300
––––––
The sales value of the work done at 31 March 20X9 has been agreed at $22 million and
the estimated cost to complete (excluding plant depreciation) is $10 million. The
specialist plant will have no residual value at the end of the contract and should be
depreciated on a monthly basis Pricewell recognises progress towards satisfaction of
the performance obligation on the outputs basis as determined by the agreed work to
date compared to the total contract price.
(iii) Pricewell’s revenue includes $8 million for goods it sold acting as an agent for Trilby.
Pricewell earned a commission of 20% on these sales and remitted the difference of
$6.4 million (included in cost of sales) to Trilby.
(iv) The directors have estimated the provision for income tax for the year ended 31 March
20X9 at $4.5 million. The required deferred tax provision at 31 March 20X9 is $5.6
million All adjustments to deferred tax should be taken to the statement of profit or
loss. The balance of current tax in the trial balance representsthe under/over provision
of the income tax liability for the year ended 31 March 20X8.

Required:
(a) Prepare the statement of profit or loss and other comprehensive income for the year
ended 31 March 20X9. (10 marks)
(b) Prepare the statement of financial position as at 31 March 20X9. (10 marks)
Note: A statement of changes in equity and notes to the financial statements are not
required.
(Total: 20 marks)

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Answer

381 PRICEWELL
(a) Pricewell – Statement of profit or loss for the year ended 31 March 20X9
$000
Revenue (310,000 + 22,000 (W1) – 6,400 (W2)) 325,600
Cost of sales (W3) (255,100)
–––––––
Gross profit 70,500
Distribution costs (19,500)
Administrative expenses (27,500)
Finance costs (W5) (1,248)
–––––––
Profit before tax 22,252
Income tax expense (700 + 4,500 – 2,800 (W7)) (2,400)
–––––––
Profit for the year 19,852
–––––––
(b) Pricewell – Statement of financial position as at 31 March 20X9
Assets $000 $000
Non?current assets
Property, plant and equipment (W4) 66,400
Current assets
Inventory 28,200
Trade receivables 33,100
Contract asset (W1) 17,100
Bank 5,500
–––––– 83,900
–––––––
Total assets 150,300
–––––––
Equity and liabilities
Equity shares of 50 cents each 40,000
Retained earnings (W6) 55,952
–––––––
95,952

Non?current liabilities
Deferred tax (W7) 5,600
Lease liability (W5) 5,716
–––––– 11,316

Current liabilities
Trade payables 33,400
Lease liability (W5) 5,132
Current tax payable 4,500 43,032
–––––– –––––––
Total equity and liabilities 150,300
–––––––
Workings
(W1) Contract with customer:
(i) Overall
$000
Selling price 50,000
Estimated cost
To date (12,000)
To complete (10,000)
Plant (8,000)
––––––
Estimated profit 20,000
––––––
(ii) Progress
Work completed to date has been agreed at $22 million so the contract is
44% complete ($22m/$50m).
(iii) Statement of profit or loss
Revenue 22,000
Cost of sales (44% × $30m total costs) (13,200)
––––––
Profit to date 8,800
––––––
(iv) Statement of financial position
Costs to date (12,000 + 2,000 depreciation (W4)) 14,000
Profit to date 8,800
Payment from customer (5,700)
––––––
Contract asset 17,100
––––––
(W2) Pricewell is acting as an agent (not the principal) for the sales on behalf of Trilby.
Therefore the statement of comprehensive income should only include $1.6
million (20% of the sales of $8 million). Therefore $6.4 million ($8m – $1.6m)
should be deducted from revenue and cost of sales. It would also be acceptable
to show agency sales (of $1.6 million) separately as other income.

(W3) Cost of sales
$000
Per question 234,500
Contract (W1) 13,200
Agency cost of sales (W2) (6,400)
Depreciation (W4) – leasehold property 1,800
– owned plant 8,500
– right?of?use asset (20,000 × 25%) 5,000
Surplus on revaluation of leasehold property (W4) (1,500)
–––––––
255,100
–––––––

(W4) Non?current assets
Property, plant and equipment
Leasehold
property
Owned plant
& equipment
Right?of?
use plant
Specialist
plant for
contract Total
$000 $000 $000 $000 $000
Valuation/cost 1 April 20X8 25,200 46,800 20,000
Depreciation 1 April 20X8 (12,800) (5,000)
––––––
34,000
Acquisition 8,000
Depreciation charge
$25,200 × 1
/14 (1,800)
$34,000 × 25% (8,500)
$8,000 × ½ × 6
/12 (2,000)
$20,000 × 25% (5,000)
––––––
23,400
Revaluation surplus 1,500
–––––– –––––– –––––– ––––––
Revaluation/carrying
amount 31 March 20X9
24,900
––––––
25,500
––––––
10,000
––––––
6,000
––––––
66,400
––––––
The leasehold property has 14 years useful life remaining at the beginning of the
year. The specialist plan was acquired on 1 October 20X8 and is therefore only
depreciated for 6 months.
The $1.5 million revaluation surplus is credited to cost of sales (W3) in the
statement of profit or loss because this represents the partial reversal of the
$2.8 million impairment loss recognised in the statement of profit or loss in the
previous year ended 31 March 20X8.

(W5) Lease liability ($000)
Balance b/f Interest 8% Payment Balance c/f
Year to 31 March 20X9 15,600 1,248 (6,000) 10,848
Year to 31 March 20Y0 10,848 868 (6,000) 5,716
Finance cost to profit or loss 1,248
Non?current liability 5,716
Current liability (10,848 – 5,716) 5,132
(W6) Retained earnings
$000
Balance at 1 April 20X8 44,100
Profit for year per part (a) 19,852
Equity dividend paid per trial balance (8,000)
––––––
Balance at 31 March 20X9 55,952
––––––
(W7) Deferred taxation
$000
Provision required at 31 March 20X9 5,600
Balance b/f per trial balance (8,400)
––––––
Credit to tax expense (2,800)
––––––