Disposal of Fixed Assets III

Introduction Objectives: –State the 3 reasons for disposal –Recognise and calculate the gain/loss on disposal of fixed assets –Record disposal of fixed asset –Prepare fixed asset a/c, provision for disposal a/c and disposal of fixed asset a/c Target group: Secondary 3 express quit

Contents Section A: Group Formation Section C: Recording of Disposal of Fixed Assets involving 3 assets with a change of biz policy Section B: Recording of Disposal of Fixed Assets involving 3 assets quit

Section A – Group Formation sec A sec Bsec C Team 1 Team 2 Team 3 Team 4Team 6 Team Represent member x with card x quit

EXAMPLE 3: (Worksheet D) Mr. BUBU started a fruit business on 1 July To improve his business, he bought two machines on 1 Jan 2001 for $10,000 each, paying by cheque. He charged depreciation on the machines at 10% per annum for each year by the reducing or diminishing balance method. Depreciation was to be recorded in a separate Provision for Depreciation Account. On 30 June 2002, after allowing for the year’s depreciation, he sold one of the machines for $8,800 which he put into the bank. On 1 October 2002, he bought another new machine on credit from MUMU for $20,000. quit sec A sec Bsec C Section B

EXAMPLE 3: (Worksheet D) BUBU’s financial year ends on 31 December. (i)Prepare the Machinery Account for each of the two years 2001 and (ii)Prepare the Provision for Machinery Depreciation Account for the two years (iii)Prepare the Machinery Disposal Account for quit Section B sec A sec Bsec C

LEDGER ENTRIES: Machinery Account $$ quit At Cost Price ,000BankJan Balance b/d20,000Jan 1 Dec 3120,000Balance c/d Section B (2x$10,000) IN (BUY)OUT (SELL) 10,000 Dec 31Disposal of Machinery 2002 Oct 1MUMU20,000 40,000 30,000Dec 31Balance c/d 30,000Jan 1Balance b/d 2003 sec A sec Bsec C

Provision for Depreciation of Machinery Account 2001 $$ 1,450 3,850 quit Dec 31Depreciation2,000Dec 31Balance c/d2, ,000Balance b/dDec Disposal of Machinery Dec 31 1,850Dec 31Depreciation Section B LEDGER ENTRIES: ($20,000x10%) Dec 31Balance c/d2, ,400Balance b/dDec 31 sec A sec Bsec C

Disposal of Machinery Account 2002 $$ 10,000MachineryJun 30 10,250 quit 1,450Provision for depreciation Dec 31 8,800BankDec Profit on disposal Dec 31 Section B LEDGER ENTRIES: Balancing figure sec A sec Bsec C

quit Selling Price = Amount received for the disposal = $8,800 Gain on disposal= SP – NBV = $ 8,800 - $ 8,550 = $ 250 Net Book Value = Price at - Total accumulated cost depreciation = $10,000 - $1,450 = $ 8,550 Provision for depreciation Section B sec A sec Bsec C

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. = Year 1 Depreciation + Year 2 Depreciation = (Cost Price x Rate) + [(Cost Price – Year 1) x Rate x Usage] Depreciation = ($10,000 x 10%) + [($10,000-$1,000) x 10% x ½] = $ 1,000 + $ 450 Section B = $ 1,450 sec A sec Bsec C quit

Section B What is the depreciation for the 3 machines in year 2002? Machine A (Bought on 1 Jan 2001) =($10,000-$1,000) x 10% =$ 900 Machine B (Dispose off on 30 June 2002) =($10,000-$1,000) x 10% x ½ =$ 450 Machine C (Bought on 1 Oct 2002) =$20,000 x 10% x 3/12 =$ 500 Therefore total depreciation = $900 + $450 +$500 = $1850 sec A sec Bsec C quit

Section C EXAMPLE 4: Mr. BUBU bought two machines on 1 Jan 2001 for $10,000 each, paying by cheque. He charged depreciation on the machines at 10% per annum for each year by the reducing or His policy is to charge a full diminishing balance method. His policy is to charge a full year’s depreciation in the year of purchases but not charge any in the year of sales. charge any in the year of sales. On 30 June 2002, he sold one of the machines for $8,800 which he put into the bank. On 1 October 2002, he bought another new machine on credit from MUMU for $20,000. quit sec A sec Bsec C

Section C EXAMPLE 4: BUBU’s financial year ends on 31 December. (i)Prepare the Machinery Account for each of the two years 2001 and 2002 (ii)Prepare the Provision for Machinery Depreciation Account for the two years (iii)Prepare the Machinery Disposal Account for quit sec A sec Bsec C

LEDGER ENTRIES: Machinery Account $$ quit At Cost Price ,000BankJan Balance b/d20,000Jan 1 Dec 3120,000Balance c/d (2x$10,000) IN (BUY)OUT (SELL) 10,000 Dec 31Disposal of Machinery 2002 Oct 1MUMU20,000 40,000 30,000Dec 31Balance c/d 30,000Jan 1Balance b/d 2003 Section C sec A sec Bsec C

Provision for Depreciation of Machinery Account 2001 $$ 1,000 4,900 quit Dec 31Depreciation2,000Dec 31Balance c/d2, ,000Balance b/dDec Disposal of Machinery Dec 31 2,900Dec 31Depreciation ($20,000x10%) Dec 31Balance c/d3, ,900Balance b/dDec 31 Section C LEDGER ENTRIES: sec A sec Bsec C

Disposal of Machinery Account 2002 $$ 10,000MachineryJun 30 10,000 quit 1,000Provision for depreciation Dec 31 8,800BankDec Loss on disposal Dec 31 Section C LEDGER ENTRIES: Balancing figure sec A sec Bsec C

quit Selling Price = Amount received for the disposal = $8,800 Loss on disposal= NBV – SP = $ 9,000 - $ 8,800 = $ 200 Net Book Value = Price at - Total accumulated cost depreciation = $10,000 - $1,000 = $ 9,000 Provision for depreciation Section C sec A sec Bsec C

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. = Year 1 Depreciation + Year 2 Depreciation = (Cost Price x Rate) + (No depreciation charged in the year) of sales = ($10,000 x 10%) + 0 = $ 1,000 Section C sec A sec Bsec C quit

What is the depreciation for the 3 machines in year 2002? Machine A (Bought on 1 Jan 2001) =($10,000-$1,000) x 10% =$ 900 Machine B (Dispose off (sold/out) on 30 June 2002) = Do not charge any depreciation in the year of sales =zero Machine C (Bought on 1 Oct 2002) = Charge a full year’s depreciation in the year of purchases =$20,000 x 10%= $ 2000 Total depreciation = $900 + $2,000 = $2,900 Section C sec A sec Bsec C quit

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 assetLoss on disposal Disposal of fixed assetProfit on disposal 5 Profit & Loss A/C Profit on disposalProfit & Loss A/C Depreciation of FA Profit & Loss A/CLoss on disposal 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

Lessons Learnt RECORD DISPOSAL OF FIXED ASSETS INVOLVING: Three fixed assets: (1) 2 fixed assets bought (2) 1 of the 2 fixed assets will be sold later (3) Buy a new fixed asset quit sec A sec Bsec C One fixed asset bought and sold Two fixed assets bought and sold one later Fixed assets with change in company’s depreciation policy

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