Question1(k) XYZ Limited purchased land for $10 million. In the second year, the land was revalued to $15 million. In the third year, the land was revalued to $12 million. At the beginning of the fourth year, the land was sold for $11 million.Which of the following belongs to the journal entries for the sale of land? CR Land 10 million CR Land 11 million DR Loss on sale 1 million CR Gain on sale 1 million DR Retained profits 2 million ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

To begin, restate what is being asked: which item among the listed entries belongs to the journal entries for the sale of land in year four, given the land was purchased for 10m, revalued up to 15m in year 2, down to 12m in year 3, and sold for 11m at the start of year 4.

Option 1: CR Land 10 million
- This would imply derecognizing the asset at its original cost. In a revaluation model, the carrying amount at disposal is what must be removed from the books, not the original cost. Therefore, posting CR Land 10m alone would not reflect the actual disposal transaction, which requires removing the carrying amount (12m) and recognizing any gain or loss on disposal. This entry is incomplete and inconsistent with the accounting for the sale.

Option 2: CR Land 11 million
- Crediting the Land account by 11m would suggest reducing the asset by the sale proceeds, which misstates the transaction. The asset should be derecognized for its carrying amount (net book value) when sold, not for the sale price. Using a credit to Land equal to the cash received would ignore the difference between carrying amount (12m) and sale price (11m) and obscure the loss on sale.

Option 3: DR Loss on sale 1 million
- A loss on sale of 1 million arises when the carrying amount (12m) exceeds the sale proceeds (11m) by 1m. The journal entry for the sale would reflect this loss to the income statement. In terms of the disposal process, you would debit Cash for 11m, debit Loss on sale for 1m, and credit Land for its carrying amount of 12m. If there is any remaining revaluation surplus connected to this asset, you would also handle that in equity on disposal, typically transferring surplus to retained earnings via an additional entry. Therefore, recognizing DR Loss on sale 1m is a correct component of the sale entries.

Option 4: CR Gain on sale 1 million
- A gain would occur if the sale proceeds exceeded the carrying amount. Here, sale proceeds are 11m and the carrying amount is 12m, so the disposal results in a loss, not a gain. A credit to Gain on sale would be inappropriate in this scenario, as it would imply a positive result when the actual result is negative.

Option 5: DR Retained profits 2 million
- Retained profits (retained earnings) would be affected when transferring any remaining revaluation surplus upon derecognition of the asset, not as a direct entry connected to the sale receipt and derecognition itself. The typical treatment would involve moving the remaining revaluation surplus from the Revaluation Surplus reserve to Retained Earnings, which would be recorded as a debit to Revaluation Surplus and a credit to Retained Earnings (not a debit to Retained Profits alone). Merely debiting Retained profits by 2 million does not accurately reflect the mechanism of reallocating the surplus and would misstate both equity and the relationship between reserves and retained earnings.

In summary, among the listed options, the item that clearly belongs to the journal entries for the sale itself is the recognition of the loss on disposal, i.e., DR Loss on sale 1 million. The other options either misstate the amount, misstate the direction of the entry, or fail to capture the correct treatment of the carrying amount and the related equity effects at disposal.

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