Questions for Practice
  Question 1
  R*uation 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 r*ued 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.
  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 r*ue its assets, and
  (b) The company follows the r*uation model of IAS16 and r*ues 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 r*uation model:
  $
  NBV 1 January 2003 – as above            10000
  R*uation 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