Question

Which of the following statements about derecognition of an asset is true​?

A.

Derecognition increases or decreases the balance of the Allowance for Derecognition account.

B.

Before a gain or loss on derecognition is​ recognized, the firm must always first recognize current period depreciation expense.

C.

A loss on derecognition occurs when the amount of cash proceeds​ (if any) is less than the acquisition cost of the asset.

D.

Derecognition requires that the firm remove the asset acquisition value from the balance sheet but not the related accumulated depreciation.

Answer 1

Derecognition is the removal of a previously recognized financial asset or financial liability from an entity's balance sheet. A financial asset should be derecognized if either the entity's contractual rights to the asset's cash flows have expired or the asset has been transferred to a third party (along with the risks and rewards of ownership). If the risks and rewards of ownership have not passed to the buyer, then the selling entity must still recognize the entire financial asset and treat any consideration received as a liability.Part of the year-end closing procedure may include a step to review all fixed assets currently on the books to see if any should be derecognized. Otherwise, an excessive amount of accumulated depreciation may clutter the balance sheet.

The carrying amount of an item of property, plant and equipment should be derecognized

(a) on disposal; or

(b) when no future economic benefits are expected from its use or disposal.

A gain or loss can be recognized from an asset’s derecognition, though a gain on derecognition cannot be recorded as revenue. The gain or loss on derecognition is calculated as the net disposal proceeds, minus the asset’s carrying value.

Hence option A is correct. Derecognition increases or decreases the balance of the Allowance for Derecognition account. Option B,C & D is incorrect based on above discussion.