In the context of settling liabilities and selling assets, which of the following situations increases realisation profit?

Correct answer: Realising proceeds from an unrecorded asset

An unrecorded asset has no book value in the firm’s books. When it is realised, the entire amount received is credited to the Realisation Account, thereby increasing realisation profit. In contrast, paying a liability above its book value, selling an asset below book value, or incurring higher realisation expenses reduces profit. Exam tip: proceeds from an unrecorded asset are treated as a gain, while payment of an unrecorded liability is treated as a gain only in the relevant settlement situation.