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.