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) ------------- 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) ––––––