Questions for Practice
Question 1
Revaluation and its impacts on the income statement, reserves and legally distributable profits
Company A purchased an item of plant on 1 January 2001 at a cost of $12500. The asset had an estimated useful life of ten years and is depreciated on a straight-line basis accordingly. The asset was revalued on 1 January 2003 at $21500. There was no change in the estimated remaining useful life of the asset on this date. The asset was sold on 1 January 2004 for $23600. There is no depreciation in the year of sale and the company prepares accounts to 31 December each year.
The retained earnings of the company brought forward on 1 January 2003 amounted to $122750.
The income statement for the year ended 31 December 2003, before the depreciation charge for the year, amounted to $37800.
The income statement for the year ended 31 December 2004, before any gain arising on the sale of the asset, amounted to $26900.
[答疑编号10020101:针对该题提问]
Required:
Show the movements on reserves during 2003 and 2004 on the basis that:
(a) The company follows the cost model of IAS16 and does not revalue its assets, and
(b) The company follows the revaluation model of IAS16 and revalues its assets.
Solution:
Under the cost model:
$
Cost 1 January 2001 12500
Depreciation up to 31 December 2002 – 2/10 (2500)
Net book value 1 January 2003 10000
Depreciation for 2003 – 1/10 x 12500 (1250)
Net book value 31 December 2003 8750
Sale proceeds 1 January 2004 23600
Gain on sale 14850
Movements on retained earnings and total reserves would be follows:
$
At 1 January 2003 122750
Profit for the year ended 31 December 2003
- before depreciation 37800
- depreciation (1250)
“Earnings” 36550
At 31 December 2003 – “max. legally
distributable profits” 159300
Profit for the year ended 31 December 2004:
- before gain on sale 26900
- gain on sale 14850
“Earnings” 41750
At 31 December 2004 – “max legally distributable
profits” 201050
Under the revaluation model:
$
NBV 1 January 2003 – as above 10000
Revaluation surplus – unrealized gain 11500
At valuation 1 January 2003 21500
Dep’n for 2003 – 21500/8 years (2688)
(Additional dep’n charged 2688 – 1250 = 1438)
NBV 31 December 2003 18812
Sale proceeds 1 January 2004 23600
Gain on sale 4788 |