Chartered Financial Analyst Level 1
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An analyst gathers the following information about property, plant, and equipment (PP&E) that is abandoned and accounted for using the cost model: Carrying value: ￡10 million Fair value at time of abandonment: ￡1 million Assuming no impairment, the abandonment of PP&E on the financial statements will result in a:
Explanation:
When an asset is abandoned under the cost model, the accounting treatment is similar to a sale, except no cash proceeds are recorded. The carrying amount of the asset (￡10 million) is removed from PP&E, and a loss equal to this amount is recognized on the income statement. This results in a reduction of ￡10 million in PP&E and a corresponding loss on the income statement. There is no impact on the cash flow statement. Option B is incorrect because the loss should reflect the carrying amount (￡10 million), not the fair value (￡1 million). Option C is incorrect because abandonment does not affect the cash flow statement.