Question

Question 1 Tap Sdn Bhd bought an asset on 5 April 2017 at a cost of RM180,000. The asset had an expected useful life of 10 years and an expected residual value of RM20,000. The company applies straight-line depreciation to this category of non-current assets. It also charges a full year depreciation in the year of acquisition and no depreciation in the year of disposal. Its financial year ends on 31 December.

At 31 December 2018, the company revalued the asset to RM240,000. Its expected remaining useful life is now 8 years, but its expected residual value is zero.

Required:

(a) Show in T account the accounting entries required to record the revaluation of the asset on 31 December 2018. [4 marks]

(b) The asset was sold on 12 February 2020 for RM235,000. Calculate the gain or loss on disposal reported in the income statement for Year 2020, and show the total effect on the disposal on the retained earnings of the company. Ignore taxation. [4 marks]

Answer 1

5-Apr-17	Cost of asset	180,000
	expected salvage value	20,000
	Life	10 years
	Depreciation under SLM = (Cost - Salvage value) / Life
	Depriciation = (180000-20000)/10
	Depriciation	16,000
5-Apr-17	Cost of asset	180,000
	Less: Depreciation for year 2017	(16,000.00)
	Less: Depreciation for year 2018	(16,000.00)
	WDV on 31st December 2018	148,000
	Revaluation	240,000
	Revaluation to be recognised	92,000
a)
31-Dec-18	Asset A/c	debit	92,000
	Revaluation reserve	credit		92,000

b) Sale value = 235,000

Calculation of WDV on 12 Feb 2020

31-Dec-18	Revalued book value of asset	240,000
	expected salvage value	0
	Life	8 years
	Depreciation under SLM = (Cost - Salvage value) / Life
	Depriciation = (240000-0)/8
	Depriciation	30,000
31-Dec-18	Revalued book value of asset	240,000
	Less: Depreciation for year 2019	(30,000)
	Less: Depreciation for year 2020	-
	WDV on 12 February 2020	210,000

Sale value = 235,000

WDV = 210,000

Gain on sale of asset = 25,000

Effect on Retained earnings - it will increase by RM 117,000 as any balance in revaluation reserve associated with the asset that is being sold should be transferred to Retained earnings

Revaluation surplus = 92,000

Gain on sale of asset = 25,000