Sooner or later a non-current asset is sold, scrapped or traded in, and the books must remove it and record the gain or loss. Before that, its value may have moved enough that the business chooses to revalue it.
This topic explains how a revaluation is recorded, how the gain or loss on disposal is worked out, the ledger entries for a sale and for a part-exchange, and what International Accounting Standard (IAS) 16 requires in the notes to the accounts.
A disposal question appeared in 6 of the 20 diets reviewed, and a schedule of movements in property, plant and equipment in three, with Section A items on profit or loss on disposal most years. Read the topic on depreciation first. The next topic covers intangible assets and impairment.
In 30 seconds
Revaluation adjusts the carrying amount of an asset to its current market value, for a whole class of assets at once. A Surplus goes to other comprehensive income and the Revaluation surplus in equity. A Loss goes to profit or loss unless it reverses an earlier surplus on the same asset. Disposal: Gain or loss = net disposal proceeds − carrying amount.
In the ledger, move the cost and the accumulated depreciation to a Disposal account, add disposal costs, credit the proceeds, and transfer the balance to profit or loss. In a Part-exchange the trade-in allowance is the sale value. IAS 16 requires a note for each class showing cost, accumulated depreciation and the movements.
Revaluation
Revaluation is adjusting the carrying amount of a non-current asset so that it reflects its current market value. Assets may rise or fall in value because of market conditions, inflation or changes in use, and revaluation ensures the amounts in the statements fairly represent current worth. The principles are:
- when an asset is revalued, All assets in the same class must be revalued at the same time (IAS 16, paragraph 36);
- revaluation is applied consistently to all similar assets; and
- revaluations are made regularly so that carrying amounts do not differ materially from fair value.
IAS 16 allows an entity to choose the cost model or the revaluation model for a class (paragraphs 29 to 31). There are two kinds of revaluation, with this accounting treatment (IAS 16, paragraphs 39 and 40).
| Type | When | Treatment |
|---|---|---|
| Upward | Market value rises, so the carrying amount is increased | The difference is a Revaluation surplus, recorded in other comprehensive income and in the revaluation surplus account in equity |
| Downward | Market value falls, so the carrying amount is reduced | The difference is a Revaluation loss, charged to profit or loss. If there is a surplus on the same asset, the loss is first set against it |
After a revaluation the asset’s fair value is its new carrying amount, and it is depreciated over its remaining useful life unless it is non-depreciable, such as land. At this level only land is dealt with.
Example. Land bought for ₦1,200,000 is revalued to ₦1,750,000. Dr Land ₦550,000, Cr Revaluation surplus ₦550,000. The land is shown at ₦1,750,000 and the surplus appears in the statement of changes in equity. If the land is later revalued to ₦1,500,000, the decrease of ₦250,000 is set against the surplus: Dr Revaluation surplus ₦250,000, Cr Land ₦250,000, leaving a surplus of ₦300,000. If it then falls to ₦1,100,000, the decrease of ₦400,000 is split: ₦300,000 against the surplus and ₦100,000 to profit or loss.
The entry is Dr Revaluation surplus ₦300,000, Dr Loss on revaluation ₦100,000, Cr Land ₦400,000.
Gain or loss on disposal
Property, plant and equipment are disposed of by sale or, if they have no sale value, as scrap. Disposal can happen at any time and need not wait for the end of the useful life. The asset, at cost, and its accumulated depreciation both leave the statement of financial position, so its carrying amount is removed. The gain or loss is:
| Calculation | ₦ |
|---|---|
| Sale proceeds | X |
| Less disposal costs | (X) |
| Net disposal value | X |
| Asset at cost | X |
| Less accumulated depreciation | (X) |
| Carrying amount at disposal | (X) |
| Gain or (loss) on disposal | X |
The gain or loss is recognised in profit or loss (IAS 16, paragraphs 67 to 71). Depreciation must be charged up to the date of disposal. If the company charges depreciation monthly, the charge for the year of sale covers the months owned. A common test is to find the accumulated depreciation first.
An asset bought for ₦96,000 on 1 June Year 1 with a five-year life and a ₦16,000 residual value is depreciated at ₦16,000 a year, which is ₦1,333 a month. Sold on 1 September Year 3 it has been depreciated for 27 months.
Accounting for the disposal
The gain or loss is recorded in a Disposal account in five steps.
- Cost. Dr Disposal account, Cr Non-current asset account (the cost of the asset).
- Accumulated depreciation. Dr Accumulated depreciation account, Cr Disposal account.
- Disposal costs. Dr Disposal account, Cr Bank or Payables.
- Proceeds. Dr Bank or Receivables, Cr Disposal account.
- Balance. The balance on the disposal account is the gain or loss, transferred to the statement of profit or loss.
Asset accounts are usually kept for a category, so after the disposal the asset account and accumulated depreciation account keep a closing balance for the remaining assets.
Part-exchange
A supplier may take an old asset in part-exchange for a new one, a trade-in. It is accounted for like a cash disposal, with two differences. The disposal value of the old asset is the Trade-in allowance.
The cost of the new asset is the Full purchase price. But the double entry is partly to bank or payables for the cash paid and partly to the disposal account for the trade-in.
Disclosure under IAS 16
IAS 16 requires notes for Each major class of property, plant and equipment (IAS 16, paragraph 73). They state the measurement bases used, the depreciation methods, the useful lives or rates, the gross carrying amounts and accumulated depreciation at the beginning and end of the period, and a Reconciliation of the opening and closing figures showing additions, disposals, the depreciation charge, assets held for sale, acquisitions through business combinations and impairment losses.
The last two items and the revaluation model are outside this syllabus.
| Sample note: ₦ million | Property | Plant | Total |
|---|---|---|---|
| Cost at the start | 8,400 | 3,100 | 11,500 |
| Additions | 600 | 520 | 1,120 |
| Disposals | (200) | (380) | (580) |
| Cost at the end | 8,800 | 3,240 | 12,040 |
| Accumulated depreciation at the start | 1,300 | 1,400 | 2,700 |
| Charge for the year | 180 | 310 | 490 |
| On disposals | (40) | (260) | (300) |
| At the end | 1,440 | 1,450 | 2,890 |
| Carrying amount at the start | 7,100 | 1,700 | 8,800 |
| Carrying amount at the end | 7,360 | 1,790 | 9,150 |
Check: cost at the end 12,040 − accumulated depreciation 2,890 = 9,150, and 7,360 + 1,790 = 9,150.
The ideas in more depth
Why disposal can produce a loss. The depreciation charged may be less than the fall in value. The loss corrects the charge. Disposal costs. They reduce the proceeds, so they increase a loss and reduce a gain. Depreciation to the date of sale. A frequent error is to use the carrying amount at the last year end.
Revaluation does not create cash. A surplus is not realised profit, which is why it goes to equity and not to profit or loss. Part-exchange. The trade-in is a sale at the allowed value, even though no cash comes in.
Sources: IAS 16 Property, Plant and Equipment: paragraphs 29 to 31 (cost and revaluation models), 36 (revaluing a class), 39 and 40 (increases and decreases), 67 to 71 (derecognition, gain or loss) and 73 (disclosure).
Worked example: Okitipupa Ltd
Scenario. The plant account shows ₦3,200,000 and accumulated depreciation ₦1,150,000 before a sale. A machine that cost ₦480,000 with accumulated depreciation of ₦312,000 to the date of sale was sold for ₦150,000, with disposal costs of ₦4,000 paid by bank. Separately, the company’s cars cost ₦640,000 with accumulated depreciation of ₦288,000. It buys a new car for ₦900,000. An old car that cost ₦210,000 with accumulated depreciation of ₦150,000 is taken in part-exchange at ₦72,000. Required: the gain or loss on each and the ledger entries.
- Machine.
Net disposal value 150,000 − 4,000 = 146,000.
Carrying amount 480,000 − 312,000 = 168,000.
Loss = ₦22,000. - Disposal account. Debit: cost 480,000 and disposal costs 4,000 = 484,000. Credit: accumulated depreciation 312,000 and proceeds 150,000 = 462,000. The balance of 22,000 on the credit side is the loss, transferred to profit or loss.
- Class accounts.
Plant at cost: 3,200,000 − 480,000 = 2,720,000.
Accumulated depreciation: 1,150,000 − 312,000 = 838,000. - Car.
Carrying amount of the old car = 210,000 − 150,000 = 60,000.
Trade-in value 72,000.
Gain = ₦12,000. - Disposal of car. Debit: cost 210,000 and gain 12,000 = 222,000. Credit: accumulated depreciation 150,000 and trade-in 72,000 = 222,000.
- Motor vehicles account. Opening 640,000, plus bank 828,000 (900,000 − 72,000), plus the trade-in 72,000, less the old car 210,000, gives 1,330,000.
Check: 640,000 + 900,000 − 210,000 = 1,330,000.
Accumulated depreciation: 288,000 − 150,000 = 138,000.
Common mistakes in the exam
- Using the sale proceeds as the gain. The gain is proceeds less the carrying amount.
- Forgetting depreciation to the date of disposal.
- Leaving out disposal costs, or adding them to the proceeds.
- Taking the full trade-in as cash received. It is not cash.
- Recording the new asset net of the trade-in. Its cost is the full price.
- Putting a revaluation surplus in profit or loss.
- Revaluing one asset and leaving the rest of its class.
Quick revision
- Revaluation: surplus to other comprehensive income (OCI) and equity. Loss to profit or loss unless it reverses a surplus.
- Disposal gain or loss = net proceeds − carrying amount.
- Disposal account: Dr cost and costs, Cr accumulated depreciation and proceeds. The balance is the gain or loss.
- Part-exchange: the trade-in is the proceeds. The new asset is at full cost.
- IAS 16 note: cost, accumulated depreciation, opening, additions, disposals, charge, closing for each class.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. A machine with a carrying amount of ₦180,000 is sold for ₦200,000. The result is a:
- Loss of ₦20,000
- Gain of ₦200,000
- Gain of ₦20,000
- Loss of ₦180,000
Show the answer
C. Proceeds of ₦200,000 less the carrying amount of ₦180,000 is a gain of ₦20,000.
Question 2. An asset cost ₦500,000 and has accumulated depreciation of ₦320,000. It is sold for ₦150,000 with disposal costs of ₦5,000. The result is a:
- Loss of ₦30,000
- Gain of ₦5,000
- Loss of ₦35,000
- Gain of ₦150,000
Show the answer
C. Net 145,000 less carrying amount 180,000 = loss 35,000.
Question 3. The cost of the asset sold is transferred to the disposal account by:
- Dr Asset, Cr Disposal
- Dr Bank, Cr Disposal
- Dr Disposal, Cr Bank
- Dr Disposal, Cr Asset
Show the answer
D. The cost leaves the asset account and goes to disposal: Dr Disposal, Cr Asset.
Question 4. The accumulated depreciation on the asset sold is transferred by:
- Dr Accumulated depreciation, Cr Disposal
- Dr Disposal, Cr Accumulated depreciation
- Dr Expense, Cr Disposal
- No entry
Show the answer
A. The accumulated depreciation is removed: Dr Accumulated depreciation, Cr Disposal.
Question 5. In a part-exchange the trade-in allowance is treated as:
- A discount on depreciation
- Income
- An expense
- The sale proceeds of the old asset
Show the answer
D. The trade-in allowance is treated as the proceeds of the old asset.
Question 6. A revaluation surplus is recorded in:
- Profit or loss
- Current liabilities
- Sales
- Other comprehensive income and equity
Show the answer
D. A revaluation surplus is recognised in other comprehensive income and held in equity.
Question 7. A revaluation loss on an asset with an earlier surplus is:
- Always charged to profit or loss
- First set against the surplus
- Ignored
- Added to cost
Show the answer
B. A loss on a previously revalued asset is first set against the revaluation surplus.
Question 8. When one asset in a class is revalued:
- Only that asset
- No other asset may be
- The whole class is revalued
- The class is depreciated
Show the answer
C. IAS 16 requires the whole class of assets to be revalued.
Question 9. Which is NOT an IAS 16 disclosure for each class?
- Sales revenue of the entity
- Depreciation methods
- Useful lives or rates
- Gross carrying amount and accumulated depreciation
Show the answer
A. The entity’s sales revenue is not a disclosure for a class of property, plant and equipment.
Question 10. The expected disposal value of an asset at the end of its life, after disposal costs, is its:
- Carrying amount
- Residual value
- Cost
- Depreciable amount
Show the answer
B. Residual value is the amount expected on disposal at the end of the asset’s life, after disposal costs.
Section B style: written questions
Question 11 (10 marks). (a) State the formula for the gain or loss on disposal and the five steps in recording it. (5 marks) (b) State FIVE disclosures required by IAS 16 for each class. (5 marks)
Question 12 (20 marks). A machine cost ₦480,000, has a residual value of ₦48,000 and a six-year life. It was bought on 1 January Year 1 and sold on 30 September Year 3 for ₦250,000, with disposal costs of ₦5,000. Depreciation is straight-line by months. Before the disposal the machinery account was ₦2,600,000 and accumulated depreciation, including the charge to the date of sale, was ₦1,520,000.
A vehicle that cost ₦600,000 with accumulated depreciation of ₦420,000 is traded in at ₦210,000 against a new vehicle costing ₦1,500,000. Land costing ₦2,000,000 is revalued to ₦2,600,000 and later to ₦2,300,000.
(a) Calculate the gain or loss on the machine. (6 marks) (b) Prepare the disposal, machinery and accumulated depreciation accounts for the machine. (6 marks) (c) Calculate the gain or loss on the traded-in vehicle. (4 marks) (d) Prepare the journals for the two revaluations. (4 marks)
A further written question
Question 13 (10 marks). Land costing ₦900,000 is revalued to ₦1,300,000, then to ₦1,000,000, then to ₦700,000. (a) Prepare the journal for each revaluation. (6 marks) (b) State the treatment of each change. (4 marks)
Model answers
Show the model answer to Question 11
(a) Gain or loss = net disposal proceeds − carrying amount. Steps: (1) Dr Disposal, Cr Asset for the cost. (2) Dr Accumulated depreciation, Cr Disposal. (3) Dr Disposal, Cr Bank for disposal costs. (4) Dr Bank or Receivables, Cr Disposal for the proceeds. (5) The balance is the gain or loss, transferred to profit or loss.
(b) Any five: measurement bases; depreciation methods; useful lives or rates; gross carrying amount and accumulated depreciation at the start and end; additions; disposals; the depreciation charge; assets held for sale.
Show the model answer to Question 12
(a)
- Annual charge (480,000 − 48,000) ÷ 6 = 72,000.
- Accumulated depreciation.
72,000 + 72,000 + 9/12 × 72,000 (54,000) = 198,000. - Carrying amount 480,000 − 198,000 = 282,000.
- Net proceeds 250,000 − 5,000 = 245,000.
- Loss = ₦37,000.
(b)
- Disposal account.
Dr cost 480,000 and costs 5,000 = 485,000 - Cr accumulated depreciation 198,000, proceeds 250,000 and loss 37,000 = 485,000.
- Machinery account.
2,600,000 − 480,000 = 2,120,000. - Accumulated depreciation.
1,520,000 − 198,000 = 1,322,000.
(c)
- Carrying amount 600,000 − 420,000 = 180,000.
- Trade-in 210,000.
- Gain = ₦30,000.
(d) First: Dr Land 600,000, Cr Revaluation surplus 600,000. Second (decrease 300,000): Dr Revaluation surplus 300,000, Cr Land 300,000, leaving a surplus of 300,000.
Show the model answer to Question 13
(a) (1) Dr Land 400,000, Cr Revaluation surplus 400,000. (2) Dr Revaluation surplus 300,000, Cr Land 300,000. (3) Dr Revaluation surplus 100,000, Dr Loss on revaluation 200,000, Cr Land 300,000. (b) The first increase goes to OCI and the surplus. The second decrease is set against the surplus, leaving 100,000. The third decrease uses the remaining 100,000 of surplus and the other 200,000 is charged to profit or loss.
Pathfinder on Disposal and revaluation of property, plant and equipment
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the previous syllabus. Asks you to prepare a schedule of property, plant and equipment for the notes, from opening cost, additions, disposals, depreciation rates and assets completed during the year.
Revise first: Disclosure under IAS 16
From the previous syllabus. Asks for the double entries for six disposal events, including sale on credit and sale to staff (7 marks), then the plant, provision for depreciation and plant disposal accounts for three plants (13 marks).
Revise first: Accounting for the disposal
From the previous syllabus. Asks for the gain or loss on disposal of plant and an old car (5 marks) and the IAS 16 schedule of movement for the year (15 marks). A similar Super Limited question is November 2017 Question 6.
Revise first: Gain or loss on disposal
From the previous syllabus. Asks for five IAS 16 disclosures (10 marks), then the gain or loss on a car taken in part-exchange (2 marks) and the motor vehicles, accumulated depreciation and disposal accounts (8 marks). The same question appears in both diets.
Revise first: Disclosure under IAS 16
From the previous syllabus. Asks for the disposal of cars from a carrying amount and accumulated depreciation, with the gain or loss and the ledger accounts. Part (a) belongs to the cost topic.
Revise first: Accounting for the disposal
From the previous syllabus. Both ask for the profit or loss on disposal of a vehicle depreciated at 25% on cost, sold after three years.
Revise first: Gain or loss on disposal
From the previous syllabus. Both ask for the effect on profit of the sale of an item of property, plant and equipment, with depreciation to the point of sale.
Revise first: Gain or loss on disposal
Asks which items belong to disposals, the gain or loss on an old car, what is not an IAS 16 disclosure, and the state of the asset account after a disposal.
Revise first: Disclosure under IAS 16
One or two items a diet ask for the gain or loss on disposal, the entries, or what is disclosed for a class. Check Section A of every diet you practise.
Revise first: Gain or loss on disposal
Source: ICAN Pathfinder, Financial Accounting. Diets covered: November Diet, 2014, May Diet, 2015, November Diet, 2016, May Diet, 2017, May Diet, 2018, November Diet, 2019, May Diet, 2021, November Diet, 2021, November Diet, 2022, May Diet, 2023, November Diet, 2023 and May Diet, 2024 (the later ones are not all on the previous syllabus). Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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