A Level Accounting (9706)•9706/13/M/J/24
Explanation
Misrecording asset disposal as sales revenue
Steps:
- Correct entry for fully depreciated asset sale: Debit bank for proceeds, debit accumulated depreciation for original cost, credit asset for original cost, credit gain on disposal for proceeds.
- Actual entry: Debit bank for proceeds, credit sales for proceeds.
- This fails to remove the asset and accumulated depreciation from books, overstating non-current assets (net effect zero, but gross overstated).
- It also credits sales instead of gain, overstating sales revenue while understating gain on disposal.
Why A is correct:
- Option A (1 and 3) matches the double effect: non-current assets overstated (1) due to non-derecognition, and sales revenue overstated (3) from misclassification per accounting standards (IAS 16).
Why the others are wrong:
- B includes 4 (e.g., expenses unaffected, no over/ understatement here).
- C includes 2 (e.g., liabilities unchanged by this entry).
- D pairs 2 and 4 (both irrelevant to the error's balance sheet and income impacts).
Final answer: A
Topic: Accounting for non-current assets
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