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Hello Sir,
in the same Centipede Co question another audit risk is as follows:
A fifth site was closed down in 20X5, however, the building was only sold in 20X6 at a loss of $825,000.
Here I want to understand if the site was closed in 20×5 then how the value of building be shown
i.e when any site closed then still the assets will be depreciated until it is sold or the depreciation will stop.Thanks,
Remember the purpose of depreciation – it is to recognise the cost of an asset as an expense again the revenue that is earned by using the asset. So if an asset is taken out of use, and depreciation is only a monthly basis, depreciation will cease.
Suppose y/e is 31 Dec 20X4.
An asset cost $600k on 1 Jan Y9 (i.e. 5 years before y/e) and had an estimated useful life of 10 years.It is taken out of use on 30 Sep 20X4 when carrying amount is $315k (i.e. 600 – 4.75 years depreciation at 60 a year).
If it is sold before the y/e any profit/loss on disposal is a reflection of over/under depreciation already expensed to profit or loss (remember depreciation is only an accounting estimate).
If not sold at the y/e, management must consider if the depreciated amount is impaired … same principle as in recent posts I have responded to … an asset cannot be carried at more than recoverable amount and same principle as for inventory … if “NRV” is less, you have to recognise the loss in value/impairment at the reporting date.
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