Disposal and revaluation: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
How were the vehicle disposal and replacement recorded in the provision for depreciation account? Use the complete source image for the figures and answer choices.
Answer: D.
The first is correct and the second is not. On disposal, the accumulated depreciation on the old vehicle is removed by DEBITING the provision for depreciation account and crediting the disposal account, so a debit entry does appear. But no depreciation is recorded on the new vehicle on 1 September: depreciation is charged at the financial year end, which here is 31 December. Nothing goes to the credit side on the date of purchase, so the answer is correct then not correct.
Question 2
Jason sold a non-current asset with a carrying value of $8000. He mistakenly recorded this by debiting the bank account and crediting the sales account with the proceeds of $6500.
By which amount was the profit for the year overstated?
Answer: D.
Done properly, the asset with a carrying value of $8000 would be taken out of the books and the $6500 proceeds set against it, giving a loss on disposal of $1500 charged against profit. What Jason recorded instead was $6500 of sales, so profit was pushed up by $6500 and the $1500 loss was never recognised at all. The overstatement is the swing between the two, $6500 plus $1500, which is D, $8000. C of $6500 counts only the false sales and forgets the missing loss, and A of $1500 counts only the loss. B of $5000 nets the two figures against each other instead of adding them.
Question 3
A company revalued its premises upwards.
Which statement about the increase in value is correct?
Answer: A.
A revaluation gain is unrealised, because the premises have not been sold and no cash has come in, which is A. It is credited to the revaluation reserve rather than debited, so B has the entry the wrong way round. It bypasses the income statement altogether and is reported in other comprehensive income and in the statement of changes in equity, so C is wrong. The revaluation reserve is a capital reserve, so it cannot be used to pay cash dividends, and the business would have no cash with which to pay them in any case.
Question 4
A business purchased a vehicle which had cost $27 000 and had an estimated residual value of $1000. Depreciation of $18 200 has been charged on this vehicle.
The vehicle was sold in part exchange for a new vehicle which cost $29 500. A cheque for $19 000 was paid in settlement of the transaction.
Which profit or loss was made on the sale of the vehicle?
Answer: C.
The vehicle's carrying amount is the $27 000 cost less the $18 200 of depreciation charged, so $8800, and the $1000 residual value is not deducted again because it is already built into that depreciation. The part exchange allowance is the new vehicle's price of $29 500 less the $19 000 cheque, so $10 500. An allowance of $10 500 against a book value of $8800 gives a profit of $1700, which is C. D of $2700 deducts the residual value a second time, and A and B read those same figures as losses, which is impossible when the allowance is above the book value.
Question 5
The following information is available. $ freehold premises at cost 125 000 provision for depreciation of freehold premises 50 000 The premises were revalued at $180 000. Which entries are required to record the revaluation? Each answer gives, in order: income statement; freehold premises at cost account; provision for depreciation; revaluation reserve.
Answer: D.
Carrying amount is 125 000 less 50 000, which is $75 000, and the revalued figure is $180 000, so the surplus is $105 000. The entries take the asset up to its new value and clear the accumulated depreciation against it: debit premises $55 000, debit provision for depreciation $50 000, credit revaluation reserve $105 000. Nothing goes to the income statement, because the gain is unrealised and a revaluation surplus is a capital reserve that cannot be distributed.
What this practice covers
These questions are drawn from past CIE 9706 Accounting papers and filtered to disposal and revaluation. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on disposal and revaluation, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Forgetting to transfer the accumulated depreciation to the disposal account.
- Comparing proceeds with cost instead of with carrying amount.
- Capitalising only the cash paid in a part exchange.
- Taking a revaluation surplus to the income statement.
- Paying a dividend out of the revaluation reserve.
- Continuing to depreciate on the old cost after a revaluation.
- Saying a profit on disposal means the asset was sold well, without explaining that it means depreciation was overcharged.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Disposal and revaluation revision notes.