Disposal of Fixed Assets I
Introduction
• Objectives:
– State the 3 reasons for disposal
– Recognise and calculate the gain/loss on
disposal of fixed assets
– Identify the two methods of recording the
disposal of fixed assets
– Record disposal of fixed asset
• Target group: Secondary 3 express
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Contents
Section A: Reasons for Disposal
Section B: Gain/Loss on Disposal
Section C: Recording of Disposal of
Fixed Assets
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K-W-L (Worksheet):
What I Know
(K)
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What I Want
to Know (W)
What I
Learned (L)
Section A – Reasons for disposal
WHEN DO YOU
DISPOSE OF
FIXED ASSETS?
^&*?#$
MR BUBU
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Section A – Reasons for disposal
SCENARIO
HELP MR BUBU TO DECIDE ON WHAT HE SHOULD
DO WITH HIS COMPUTER.
GIVE REASONS FOR
YOUR DECISION.
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Section A – Reasons for disposal
SCENARIO
HELP MR BUBU TO DECIDE ON WHAT HE SHOULD
DO WITH HIS DELIVERY
VAN. GIVE REASONS FOR
YOUR ACTION.
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Section A – Reasons for disposal
Main reasons for the disposal of fixed
asset in business are:
Obsolescence
High costs of repairs and maintenance
Frequent breakdowns
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Section B – Profit/Loss on Disposal
When fixed assets are disposed of or
traded in for new assets, the selling prices
are generally different from the book
values of the assets concerned.
Selling Price = Amount received for the
disposal
Net Book
Value
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= Price at – Total accumulated
cost
depreciation
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Section B – Profit/Loss on Disposal
When fixed assets are disposed of or
traded in for new assets, the selling prices
are generally different from the book
values of the assets concerned.
PROFIT/(LOSS) ON DISPOSAL =
SELLING PRICE – NET BOOK VALUE
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Section B – Profit/Loss on Disposal
Profit on Disposal of Asset occurs
when:
>
SELLING PRICE
OF DELIVERY VAN
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>
NET BOOK VALUE
OF DELIVERY VAN
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Section B – Profit/Loss on Disposal
Loss on Disposal of Asset occurs
when:
<
SELLING PRICE
OF DELIVERY VAN
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<
NET BOOK VALUE
OF DELIVERY VAN
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Section B – Profit/Loss on Disposal
EXAMPLE 1:
Mr. BUBU bought a delivery van on 1 January 2001 for
$20,000. BUBU decides to depreciate the delivery van
at the rate of 20% per annum. On 31 December 2002
due to the high cost of repairs and maintenance, BUBU
sold it for $15,000 to MUMU.
What is the selling price & net book value?
Find the gain/loss on disposal…
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Time Line
Selling Price
$15,000
IN
Depreciation 20% per annum
I Jan
2001
$4,000
31 Dec
$4,000
2001
31 Dec
2002
OU
T
$20,000
Cost Price
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Section B – Profit/Loss on Disposal
Provision for
depreciation
Selling Price = Amount received for the
disposal
= $15,000
Net Book Value = Price at - Total accumulated
cost
depreciation
= $20,000 - $8,000
Price x Rate x Usage
= $12,000 Cost $20,000x20%x2
Gain/loss on disposal = SP – NBV
= $ 3,000
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Section B – Profit/Loss on Disposal
COST PRICE USAGE RATE
$20,000
2 years
20%
Provision for
depreciation
$8,000
SP
GAIN/LOSS
NBV
$15,000 $12,000
$3,000
SP - NBV
$20,000x20%x2
Cost Price
x Rate x Usage
$20,000-$8,000
Cost Price
- Provision
What will happen if BUBU changes the rate of
depreciation to:
(a) 10% per annum?
(b) 50% per annum?
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Section B – Profit/Loss on
COST PRICE USAGE RATE
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Provision for
depreciation
SP
Cost price –
Disposal
Provision for
depreciation
NBV
GAIN/(LOSS)
SP - NBV
$20,000
Cost Price x Rate x Usage
2 years 10%
$4,000
$15,000 $16,000
$20,000
2 years 20%
$8,000
$15,000 $12,000
$3,000
$20,000
2 years 50%
$10,000
$15,000
$15,000
($1,000)
0
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Section B – Profit/Loss on Disposal
Profit from Disposal of Asset indicates that the
depreciation expense for the asset has been
overestimated over its useful life
Loss from Disposal of Asset indicates that the
depreciation expense for the asset has been
underestimated over its useful life
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Section C – Recording
• Two methods of recording disposal of fixed
assets:
(a) A separate disposal of fixed asset
account
(b) No disposal of fixed asset account
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Section C – WITH DISPOSAL A/C
EXAMPLE 1:
Mr. BUBU bought a delivery van on 1 January 2001 for
$20,000. BUBU decides to depreciate the delivery van
at the rate of 20% per annum. On 31 December 2002
due to the high cost of repairs and maintenance, BUBU
sold it for $15,000 to MUMU.
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
Depreciation
STEP 1
2002
Dec 31 Depreciation of vehicle
DEBIT
CREDIT
$
4,000
$
4,000
Provision for depreciation of
vehicle
(Being depreciation of delivery van
for the second year)
For this second year only
$20,000 x 20%
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
2002
Dec 31 Disposal of vehicle
Transfer
STEP 2aA
DEBIT
CREDIT
$
$
20,000
Vehicle
(Being transfer of delivery van sold
to Disposal Account)
20,000
At Cost Price
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
2002
Dec 31 Provision for depreciation of
vehicle
Transfer
B
STEP 2b
DEBIT
CREDIT
$
$
8,000
?
8,000
?
Disposal of vehicle
(Being transfer of accumulated
depreciation of delivery van to
Disposal Account)
Calculation?
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
2002
Dec 31 Bank
WhatSTEP
you receive?
3
DEBIT
CREDIT
$
$
15,000
Disposal of vehicle
15,000
(Being cash received from disposal
of delivery van)
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
2002
Dec 31 Disposal of vehicle
Profit/Loss?
STEP 4
DEBIT
CREDIT
$
$
3,000
3,000
Profit & Loss
(Being delivery van which has a net
book value of $12,000 and selling
price at $15,000)
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Workings
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Section C – WITH DISPOSAL A/C
JOURNAL
ENTRIES:
General Journal
DATE
PARTICULARS
2002
Dec 31 Profit & Loss Account
Closing
A
STEP 5a
DEBIT
CREDIT
$
$
4,000
4,000
Depreciation of vehicle
(Being closing of depreciation to
Profit and Loss Account)
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Workings
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Section C – WITH DISPOSAL A/C
LEDGER Show how you would record
ENTRIES: in the firm’s book for 2 years
IN (BUY)
2001
Jan 1 Bank
2002
Jan 1 Balance b/d
Vehicle Account
$
At Cost Price
OUT (SELL)
$
2001
20,000 Dec 31 Balance c/d
20,000
2002
20,000 Dec 31 Disposal of
vehicle
20,000
Any purchase or sales of fixed assets are recorded
at the ORIGINAL COST of the asset
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
$20,000
20% Account
Depreciation onx Vehicle
2001
Dec 31 Provision for
depreciation
2002
Dec 31 Provision for
depreciation
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$
4,000
4,000
2
2001
Dec 31 Profit & Loss
A/c
2002
Dec 31 Profit & Loss
A/c
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$
4,000
4,000
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
$20,000
x 20% 3
Provision for Depreciation of Vehicle Account
2001
Dec 31 Balance c/d
2002
Dec 31 Disposal of
vehicle
$
4,000
2001
Dec 31 Depreciation
$
4,000
8,000
2002
Dec 31 Balance b/d
4,000
Dec 31 Depreciation
4,000
8,000
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8,000
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
What is the amount of the provision for
depreciation that is required to be transferred to
the vehicle disposal account?
= FULL AMOUNT of the accumulated depreciation
on the DISPOSED ASSET up to the date of sale.
= Cost Price x Rate of depreciation x Usage
= $20,000 x 20% x 2
= $ 8,000
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
4
Disposal of Vehicle Account
2002
$
2002
Dec 31 Vehicle
20,000 Dec 31 Provision for
depreciation
Dec 31 Profit & Loss 3,000
Dec 31 Bank
15,000
23,000
23,000
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$
8,000
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
5
Bank Account
2001
Jan 1 Vehicle
2002
Dec 31 Disposal of
vehicle
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$
20,000
Bank Account
$
15,000
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Section C – WITH DISPOSAL A/C
LEDGER
ENTRIES:
7
Profit and Loss for the year ended 31 Dec 2001
2001
$
Dec 31 Depreciation 4,000
of vehicle
Profit and Loss for the year ended 31 Dec 2002
2002
$
Dec 31 Depreciation 4,000
of vehicle
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2002
Dec 31 Disposal of
Vehicle
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$
3,000
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Lessons Learnt
3 Reasons for Disposal of Fixed Assets:
•Obsolescence
•High costs of repairs and maintenance
•Frequent breakdown
Gain/Loss on Disposal when:
•Selling Price >/< Net Book Value
Two methods of recording Disposal of Fixed Assets:
•With a separate disposal of fixed assets account
•Without a disposal of fixed assets account
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Lessons Learnt
DISPOSAL OF FIXED ASSETS
DEBIT
Steps
CREDIT
Depreciation
Depreciation
1 Provision
Disposal of fixed asset
for depreciation
Fixed Asset
Transfer
2
Provision for depreciation
Disposal of fixed asset
Bank (cash received)
Fixed asset (trade in)
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Receive?
3
Disposal of fixed asset
Disposal of fixed asset
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Lessons Learnt
DISPOSAL OF FIXED ASSETS
DEBIT
Steps
CREDIT
(If Loss) Profit & Loss
Disposal of fixed asset
Profit/Loss?
4
Disposal of fixed asset
Profit & Loss A/C
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(If Profit) Profit & Loss
Closing
5
Depreciation of FA
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Lessons Learnt
5 STEPS to RECORD DISPOSAL OF
FIXED ASSETS
(1) Depreciation
(2) Transfer
(3) Received?
(4) Profit/Loss?
(5) Closing
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Prepared by
Tan Seet Ling, Patrina
31 October 2001
national institute of education
copyright 2001
micro
teachings
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