Grade 11
Term 1: Week 6
ACCOUNTING
Topic: Fixed Assets (Asset Disposal)
You already know about...
The lesson will enable you to...
•
Fixed/Tangible assets (buying)
•
record purchases of fixed assets
•
Calculation methods of deprecation
•
•
Fixed assets in Financial Statements
calculate depreciation when an asset is sold in the
beginning or end of a financial year, as well as during
the year (pro-rata)
•
Record disposal of fixed assets
•
Record Fixed assets in Financial Statements
Use your TEXT BOOK to read about:
Asset Disposal (movement of Assets)
Pay attention to:
• Disposal of asset during the year
• Replacement & trade in of assets
• Fixed asset Note
• Profit/Loss on sale of assets
FULLY DEPRECIATED ASSET
•
A business may decide to keep an asset even though it has exceeded its
expected lifespan and has been fully depreciated.
•
Historical cost concept: An asset has to be recorded at its original cost
price for as long as the business owns the asset.
•
When the asset has been fully depreciated, it should be reflected at a
carrying value of R1 (residual value) in the books.
EXAMPLE
The information relates to Mod Stores. Their financial year ends on 28 February 2021.
REQUIRED:
1. Calculate the depreciation on vehicles for the year ended 28 February 2021
2. Complete the Fixed Assets note (Vehichles only) to the Statement of Financial Position.
INFORMATION:
A.
Balances on 1 March 2020
Vehicles (Cost price)
Accumulated depreciation on vehicles
B.
280 000
252 000
Additional information
• The business only has one vehicle.
• Provide for depreciation on vehicles at 20% p.a. on cost price
EXAMPLE: SOLUTION
1.
Calculation of depreciation
ANSWER
Annual depreciation :
R280 000 x 20% = R56 000
BUT
Accumulated depr at 28 Feb. will be = R308 000 (R252 000 + R56 000)
RESULT: Carrying value of vehicles = NEGATIVE R28 000 (R280 000 – R308 000)
which is IMPOSSIBLE, as the asset item is still in use.
R 27 999
NB:
The carrying value of the vehicles cannot be less than R1
Therefore the accumulated depreciation cannot exceed = R279 999
MAXIMUM deprecation for the current year (R279 999 – R252 000)
2. FIXED ASSET NOTE in the Statement of Financial Position
Carrying value at beginning
Vehicles
28 000
Cost price
Accumulated depreciation
280 000
(252 000)
Movements
Additions at cost
Disposal at carrying value
Depreciation for the current year
Carrying value at end
Cost price
Accumulated depreciation
0
(0)
(27 999)
R1
280 000
(279 999)
ASSET DISPOSAL
A business would sell/dispose of a fixed asset when it is no longer needed.
Reasons for selling / disposing of fixed assets:
• Asset is old / obsolete / outdated
• To replace an asset which is not in a good condition
• To upgrade (technological advances)
Disposal of an asset (when?):
• At beginning of the financial year
• During the financial year
• At end of financial year
Disposal of an asset (how?):
• Selling (cash or on credit)
• Trade-in
• Taken for personal use
• Donated
NOTE: When the business disposes/sells a fixed asset, the business has to remove ALL information relating
to that asset from the books of the business.
STEPS FOR ASSET DISPOSAL
Step 1: Transfer of cost price
Dr Asset Disposal
Cr Fixed Asset (Vehicles or Equipment)
Dr Depreciation
Cr Accumulated depreciation on Vehicles /
Step 2: Write off depreciation
(ONLY IF DISPOSED OF DURING AND AT END OF YEAR)
Equipment
Dr Accumulated depreciation
Cr Asset Disposal
Step 3: Transfer Accumulated Depreciation
on the asset sold/disposed of
ONLY FOR THE ASSET SOLD:
Accumulated Depr (beginning of year) + Depreciation (current year)
Double entry per disposal method
Disposal method
Step 4:
Record the selling price
Sold for cash
Dr Bank
Cr Asset Disposal
Sold for credit
Dr Debtors Control
Cr Asset Disposal
Trade-in
Dr Creditors Control
Cr Asset Disposal
Taken for
personal use
Dr Drawings
Cr Asset Disposal
Donations
Dr Donations
Cr Asset Disposal
Profit:
Dr Asset disposal
Cr Profit on sale of asset
Loss:
Dr Loss on sale of asset
Cr Asset disposal
Step 5:
Record the profit / loss on sale of asset
EXAMPLE (Disposal at END OF YEAR)
On 28 February 2021, the old desk, cost R12 000, was sold for R3 000 cash.
The accumulated depreciation on this desk on 1 March 2020 (the beginning of the financial year),
was R9 600.
Depreciation on equipment is provided for at 20% p.a. on diminishing balance method.
EXAMPLE SOLUTION
Dr
2020
Mar
2021
Feb
1
28
Balance
Asset Disposal 
GENERAL LEDGER OF THORPE TRADERS
Equipment
2021
b/d
12 000 Feb
28
Asset disposal 
Accumulated depreciation on Equipment
2020
1
Balance
GJ
10 080 March
2021
28
Depreciation 
Feb
10 080
Cr
GJ
12 000
b/d
8 400
GJ
1 680
10 080
Depreciation
2021
Feb
28
Accumulated
depreciation on
equipment 
1 680
2021
Feb
28
Profit and loss
1 680
Date of sale
Total accumulated
depreciation
Cost of asset sold
ASSET DISPOSAL
2021
Feb
28
Equipment 
GJ
12 000
Profit on sale of
asset 
GJ
1 080
2021
Feb
28
Accumulated depreciation
on equipment
(8 400 +1 680) 
GJ
10 080
Bank 
GJ
3 000
13 080
13 080
Depreciation for
this year
Balancing figure
Cash Sale /
Selling price
ACTIVITY 1 (Disposal at end of year)
The information relates to Elrie Traders on 30 June 2020, the end of the financial year.
REQUIRED:
1.1
Calculate the amounts for (a) and (b) in the Accumulated depreciation on Vehicles account.
1.2
Prepare the Asset Disposal account.
INFORMATION:
Extract from the General Ledger:
GENERAL LEDGER OF ELRIE TRADERS
Vehicles
Dr
2019
July
2020
June
1
Balance
b/d
480 000
30
Creditors Control
CJ
150 000
2020
June
30
Cr
Asset Disposal
GJ
110 000
Balance
c/d
520 000
630 000
2020
July
1
Balance
b/d
630 000
520 000
Accumulated depreciation on Vehicles
2020
June
30
Asset Disposal
GJ
(b)
2019
July
2020
June
1
Balance
b/d
133 200
30
Depreciation
GJ
(a)
Additional information:
•
On 30 June 2020 an old vehicle was traded-in for a new one. The trade-in value received for the od
vehicle was R58 000.
•
The accumulated depreciation on the vehicle traded-in was R30 525 on 1 July 2019.
•
Depreciation on vehicles is calculated at 15% on cost price.
ACTIVITY 1: Answer Sheet
1.1
(a)
Depreciation:
Workings
(b)
Accumulated depreciation on asset traded-in:
ANSWER
Asset Disposal account
EXAMPLE (Disposal DURING THE YEAR)
Marais Traders, owned by S Marais, wants to upgrade their Vehicles, and decided to sell off one of the older
vehicles. The information below wat extracted from the books at the end of the financial year on
28 February 2021.
REQUIRED
Calculate:
1. Depreciation for the current financial year
2.
Profit or Loss on sale of asset (You may use the Asset Disposal a/c or do the calculation)
INFORMATION
A. Balances on 1 March 2020
Vehicles (Cost price)
Accumulated depreciation on vehicles
560 000
91 200
B. The old vehicle was sold on 31 August 2020 to A Bornman for R120 600 on credit. The cost price of this
vehicle was R280 000 and the accumulated depreciation on 1 March 2020 was R120 800.
C. Depreciation on vehicle is calculated at 10% p.a. on the cost price.
EXAMPLE SOLUTION (During the year)
1.
ANSWER
x 6/12
(1 March - 31 Aug)
R14 000
Depreciation for the year
280 000 x 10/100
2.
Workings
Profit or Loss on sale of asset:
(see no1)
Loss on sale of Asset:
280 000 - (120 800 + 14 000) - 120 600
CP
-
Tot ACD of the item
R24 600
- SP
ALTERNATIVE 'calculation': (A rough T-account without detail may be completed if only calculations are required)
ASSET DISPOSAL
2020
Aug
31
Vehicles
280 000
2020
Aug
31
Accumulated
Depreciation on
Vehicles
134 800
(120 800 + 14 000)
Debtors control
Loss on sale of asset
280 000
120 600
24 600
280 000
ACTIVITY 2 (Disposal DURING the year)
The information relates to Cheri Traders. Their financial year ended on 28 February 2021.
REQUIRED:
2.1 Prepare the Asset Disposal Account for the laptop sold.
2.2 Explain how a Fixed Asset Register can be of assistance to the internal auditor. Provide TWO points.
INFORMATION:
• A laptop was sold for R7 000 on 31 August 2020 on credit to T. Rex.
•
Extract from the Asset Register for the laptop sold:
FIXED ASSET REGISTER
Item:
Cost:
Date purchased
Rate of depreciation
28 February 2018
28 February 2019
28 February 2020
31 August 2020
ACB123
Lenova Laptop
R30 000
1 Nov 2017
20% p.a. on diminishing balance
Depreciation
Accumulated
depreciation
Carrying value
R1 500
R5 700
R4 560
?
R 1 500
R 7 200
R11 760
?
R28 500
R22 800
R18 240
?
ACTIVITY 2: Answer Sheet
Asset Disposal
2.2
Explain how a Fixed Asset Register can be of assistance to the internal auditor. Provide TWO points.
ACTIVITY 3 (Fixed Asset Note)
The information relates to Jimmy Stores on 30 June 2020, the end of their financial year.
REQUIRED:
3.1 Prepare the Fixed Asset Note on 30 June 2020. Show workings in the Answer sheet provided.
3.2
Calculate the total accumulated depreciation on the vehicle traded-in.
INFORMATION:
Extract from the Pre-adjustment Trial Balance on 30 June 2020
Land and Buildings (1/7/2019)
Vehicles (1/7/2019)
Accumulated depreciation on vehicles
3 200 000
520 000
200 660
Additional information:
•
Land and buildings were purchased during the year.
• On 30 June 2020 an old vehicle with a cost price R190 000, was traded-in on a new one for R8 900. The
accumulated depreciation on the trade-in vehicle was R106 900 at the beginning of the financial year.
•
Vehicles are depreciated by 15% p.a. on the diminishing balance method.
ACTIVITY 3: ANSWER SHEET
3.1 Fixed/Tangible Asset note
Land and building
Carrying value at beginning of year
3 200 000
Cost
3 200 000
Accumulated depreciation
Vehicles
520 000
(200 655)
Movements
Additions at cost
200 000
Disposals at carrying value
0
Depreciation
0
Carrying value at end of year
Cost
4 800 000
Accumulated depreciation
3.2
0
Calculate the total accumulated depreciation on the vehicle traded-in