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 quit

Contents Section A: Reasons for Disposal Section C: Recording of Disposal of Fixed Assets Section B: Gain/Loss on Disposal quit

K-W-L (Worksheet): quit

Section A – Reasons for disposal ^&*?#$ MR BUBU WHEN DO YOU DISPOSE OF FIXED ASSETS? sec A sec Bsec C quit

SCENARIO HELP MR BUBU TO DECIDE ON WHAT HE SHOULD DO WITH HIS COMPUTER. GIVE REASONS FOR YOUR DECISION. 486 DX Model Section A – Reasons for disposal quit sec A sec Bsec C

SCENARIO HELP MR BUBU TO DECIDE ON WHAT HE SHOULD DO WITH HIS DELIVERY VAN. GIVE REASONS FOR YOUR ACTION. Section A – Reasons for disposal quit sec A sec Bsec C

Main reasons for the disposal of fixed asset in business are: Section A – Reasons for disposal quit Frequent breakdownsHigh costs of repairs and maintenance Obsolescence sec A sec Bsec C

Section B – Profit/Loss on Disposal Selling Price = Amount received for the 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. Net Book = Price at – Total accumulated Valuecost depreciation quit sec A sec Bsec C

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. quit PROFIT/(LOSS) ON DISPOSAL = SELLING PRICE – NET BOOK VALUE sec A sec Bsec C

SELLING PRICE OF DELIVERY VAN Profit on Disposal of Asset occurs when: NET BOOK VALUE OF DELIVERY VAN > > quit Section B – Profit/Loss on Disposal sec A sec Bsec C

Loss on Disposal of Asset occurs when: SELLING PRICE OF DELIVERY VAN NET BOOK VALUE OF DELIVERY VAN < < quit Section B – Profit/Loss on Disposal sec A sec Bsec 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. What is the selling price & net book value? Find the gain/loss on disposal… quit Section B – Profit/Loss on Disposal sec A sec Bsec C

Time Line quit I Jan 2001 IN OU T $20,000 $15, Dec 2001 sec A sec Bsec C 31 Dec 2002 Depreciation 20% per annum $4,000 Cost Price Selling Price

Cost Price x Rate x Usage quit Section B – Profit/Loss on Disposal Selling Price = Amount received for the disposal = $15,000 Gain/loss on disposal = SP – NBV = $ 3,000 Net Book Value = Price at - Total accumulated cost depreciation $20,000x20%x2 = $20,000 - $8,000 = $12,000 Provision for depreciation sec A sec Bsec C

What will happen if BUBU changes the rate of depreciation to: (a)10% per annum? (b)50% per annum? quit Section B – Profit/Loss on Disposal Cost Price - Provision COST PRICEUSAGERATENBV GAIN/LOSS $20,0002 years20%$12,000 Provision for depreciation $8,000$3,000 SP - NBV Cost Price x Rate x Usage SP $15,000 $20,000x20%x2 $20,000-$8,000 sec A sec Bsec C

COST PRICEUSAGERATENBV GAIN/(LOSS) $20,0002 years20% $20,0002 years50%0$15,000 $20,0002 years10%$16,000 SP $15,000 $3,000$12,000 ($1,000) quit Section B – Profit/Loss on Disposal Cost price – Provision for depreciation Provision for depreciation $8,000 $10,000 $4,000 SP - NBV Cost Price x Rate x Usage sec A sec Bsec C

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 quit Section B – Profit/Loss on Disposal sec A sec Bsec C

Section C – Recording Two methods of recording disposal of fixed assets: (a)A separate disposal of fixed asset accountA separate disposal of fixed asset (b)No disposal of fixed asset account quit sec A sec Bsec 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. Section C – WITH DISPOSAL A/C quit sec A sec Bsec C Workings

Section C – WITH DISPOSAL A/C PARTICULARS JOURNAL ENTRIES: General Journal DATEDEBITCREDIT 2002$$ STEP 1 4,000 Depreciation of vehicle Provision for depreciation of vehicle (Being depreciation of delivery van for the second year) Dec 31 quit For this second year only $20,000 x 20% sec A sec Bsec C Workings Depreciation

Section C – WITH DISPOSAL A/C PARTICULARS General Journal DATEDEBITCREDIT $$ STEP 2a ,000 Disposal of vehicle Vehicle (Being transfer of delivery van sold to Disposal Account) Dec 31 quit At Cost Price sec A sec Bsec C Workings Transfer A JOURNAL ENTRIES:

Section C – WITH DISPOSAL A/C General Journal DATEDEBITCREDIT $$ STEP 2b PARTICULARS ,000 Provision for depreciation of vehicle Disposal of vehicle (Being transfer of accumulated depreciation of delivery van to Disposal Account) Dec 31 quit sec A sec Bsec C ? ? Calculation? Workings Transfer B JOURNAL ENTRIES:

Section C – WITH DISPOSAL A/C General Journal DATEDEBITCREDIT $$ STEP 3 PARTICULARS 2002 Bank Disposal of vehicle (Being cash received from disposal of delivery van) Dec 31 15,000 quit sec A sec Bsec C Workings What you receive? JOURNAL ENTRIES:

Section C – WITH DISPOSAL A/C General Journal DATEDEBITCREDIT $$ STEP 4 PARTICULARS ,000 Disposal of vehicle Profit & Loss (Being delivery van which has a net book value of $12,000 and selling price at $15,000) Dec 31 quit sec A sec Bsec C Workings Profit/Loss? JOURNAL ENTRIES:

Section C – WITH DISPOSAL A/C General Journal DATEDEBITCREDIT $$ STEP 5a PARTICULARS ,000 Profit & Loss Account Depreciation of vehicle (Being closing of depreciation to Profit and Loss Account) Dec 31 quit sec A sec Bsec C Workings Closing A JOURNAL ENTRIES:

Section C – WITH DISPOSAL A/C LEDGER ENTRIES: Vehicle Account $$ sec A sec Bsec C quit Dec 3120,000Disposal of vehicle 2002 At Cost Price 2001 Bank20,000Jan Balance b/d20,000Jan 1 Dec 3120,000Balance c/d Any purchase or sales of fixed assets are recorded at the ORIGINAL COST of the asset IN (BUY)OUT (SELL) Show how you would record in the firm’s book for 2 years

Section C – WITH DISPOSAL A/C Depreciation on Vehicle Account 2001$$ Provision for depreciation 4,000Dec 31 sec A sec Bsec C quit 4,000Profit & Loss A/c Dec Provision for depreciation 4,000Dec ,000Profit & Loss A/c Dec 31 $20,000 x 20% LEDGER ENTRIES:

Section C – WITH DISPOSAL A/C Provision for Depreciation of Vehicle Account 2001 $$ 8,000 sec A sec Bsec C quit Dec 31Depreciation4,000Dec 31Balance c/d4, ,000Balance b/dDec Disposal of vehicle Dec 31 4,000Dec 31Depreciation $20,000 x 20% 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 Section C – WITH DISPOSAL A/C sec A sec Bsec C LEDGER ENTRIES: quit

Section C – WITH DISPOSAL A/C Disposal of Vehicle Account 2002 $$ Vehicle20,000Dec 31 23,000 sec A sec Bsec C quit 8,000Provision for depreciation Dec 31 Bank15,000Dec 31 Profit & Loss3,000Dec 31 LEDGER ENTRIES:

Section C – WITH DISPOSAL A/C Bank Account $ sec A sec Bsec C quit LEDGER ENTRIES: Vehicle20,000Jan Bank Account 2002$ Disposal of vehicle 15,000Dec 31

Profit and Loss for the year ended 31 Dec $ Depreciation of vehicle 4,000Dec 31 Section C – WITH DISPOSAL A/C sec A sec Bsec C quit LEDGER ENTRIES: Profit and Loss for the year ended 31 Dec $$ Depreciation of vehicle 4,000Dec 313,000Disposal of Vehicle Dec 31

Lessons Learnt quit 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 sec A sec Bsec C

DISPOSAL OF FIXED ASSETS DEBITCREDITSteps Lessons Learnt Bank (cash received) 3 Disposal of fixed asset Fixed asset (trade in)Disposal of fixed asset Fixed Asset Provision for depreciationDisposal of fixed asset 2 1 Provision for depreciationDepreciation quit sec A sec Bsec C Depreciation Transfer Receive?

Lessons Learnt DISPOSAL OF FIXED ASSETS DEBITCREDITSteps 4 Disposal of fixed asset(If Loss) Profit & Loss Disposal of fixed asset(If Profit) Profit & Loss 5 Profit & Loss A/CDepreciation of FA quit sec A sec Bsec C Profit/Loss? Closing

Lessons Learnt 5 STEPS to RECORD DISPOSAL OF FIXED ASSETS (1) Depreciation (2) Transfer (3) Received? (4) Profit/Loss? (5) Closing quit sec A sec Bsec C

micro teachings Prepared by Tan Seet Ling, Patrina 31 October 2001 national institute of education copyright 2001 quit