1. Accounting Practices 501 Chapter 9 Disposal of fixed assets Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

2. Disposal Ch9B - Disposal2 What happens when we get rid of a fixed asset, by selling it? $20,000

3. Disposal Ch9B - Disposal3 There are a few things to think about 1. Record the proceeds of the disposal (cash or other) 4. Close the disposal account by transferring the balance to a gain on disposal or a loss on disposal account $20,000 2. Close the fixed asset account (Computers) 3. Close the accumulated depreciation account (Computers) Depreciation is not calculated in the year of disposal Steps to follow for the disposal of an asset:

4. Disposal Ch9B - Disposal4 1. Record the proceeds of the disposal (cash or other) 4. Close the disposal account by transferring the balance to a gain on disposal or a loss on disposal account $20,000 2. Close the fixed asset account (Computers) Depreciation is not calculated in the year of disposal Steps to follow for the disposal of an asset: All the above are done through a temporary Disposal account 3. Close the accumulated depreciation account (Computers)

5. Disposal Ch9B - Disposal5 Extract from Trial Balance at date of disposal DrCr Computers at cost20,000 Accum. Deprec (Computers)12,000 Can you see that the book value of the Computers is $8,000? Book value = Cost price less accum. deprec. On 1 Feb 20X2: Sold computers for cash, $6,000 (GST exclusive) We can therefore immediately see that we received less than it was worth, which means a loss of $2,000 (8,000-6,000)

6. Disposal Ch9B - Disposal6 Extract from Trial Balance at date of disposal DrCr Computers at cost20,000 Accum. Deprec (Computers)12,000 On 1 Feb 20X2: Sold computers for cash, $6,000 (GST exclusive) Step 1. Record the proceeds of the disposal (cash) Date Account Titles DebitCredit 1/2/X2 GST Collected 6,900 General Journal Bank 900 Being entry required to record sale of computers Disposal (Computers)6,000

7. Disposal Ch9B - Disposal7 Step 1. Record the proceeds of the disposal (cash) Date Account Titles DebitCredit 1/2/X2 GST Collected 6,900 General Journal Bank 900 Being entry required to record sale of computers Disposal (Computers)6,000 Date General Ledger Details Ref DrCr Balance Disposal (Computers) 1/2/X2Bank 6,0006,000 CrGJ Lets post to the Disposal account in the Gen Ledger

8. Disposal Ch9B - Disposal8 Extract from Trial Balance at date of disposal DrCr Computers at cost20,000 Accum. Deprec (Computers)12,000 On 1 Feb 20X2: Sold computers for cash, $6,000 (GST exclusive) Step 2. Close the asset account Date Account Titles DebitCredit 1/2/X2 Computers at cost General Journal 20,000 Being entry required to close the asset accounts Disposal (Computers) 20,000

9. Disposal Ch9B - Disposal9 Step 2. Close the asset account Date Account Titles DebitCredit 1/2/X2 Computers at cost General Journal 20,000 Being entry required to close the asset and accum deprec accounts Disposal (Computers) 20,000 Date General Ledger Details Ref DrCr Balance Disposal (Computers) 1/2/X2Bank 6,0006,000 CrGJ Lets post to the Disposal account in the Gen Ledger Comp at cost 20,00014,000 DrGJ

10. Disposal Ch9B - Disposal10 Extract from Trial Balance at date of disposal DrCr Computers at cost20,000 Accum. Deprec (Computers)12,000 On 1 Feb 20X2: Sold computers for cash, $6,000 (GST exclusive) Step 3. Close the accum depreciation account Date Account Titles DebitCredit 1/2/X2 General Journal Being entry required to close the accum deprec account Disposal (Computers) 12,000 Accum. Deprec. (Computers) 12,000

11. Disposal Ch9B - Disposal11 Step 3. Close the accum depreciation account Date Account Titles DebitCredit 1/2/X2 General Journal Being entry required to close the accum deprec account Disposal (Computers) 12,000 Accum. Deprec. (Computers) 12,000 Date General Ledger Details Ref DrCr Balance Disposal (Computers) 1/2/X2Bank 6,0006,000 CrGJ Lets post to the Disposal account in the Gen Ledger Comp at cost 20,00014,000 DrGJ Accum deprec 12,000 2,000 DrGJ

12. Disposal Ch9B - Disposal12 Step 4. Close the disposal account Date General Ledger Details Ref DrCr Balance Disposal (Computers) 1/2/X2Bank 6,0006,000 CrGJ Comp at cost 20,00014,000 DrGJ Accum deprec 12,000 2,000 DrGJ The balance in the Disposal account represents the loss on disposal of the computers - the book value was $8000 and we sold it for $6000 Date Account Titles DebitCredit 1/2/X2 General Journal Being entry required to close the disposal account and record the loss Disposal (Computers) 2,000 Loss on disposal 2,000

13. Disposal Ch9B - Disposal13 Step 4. Close the disposal account Date General Ledger Details Ref DrCr Balance Disposal (Computers) 1/2/X2Bank 6,0006,000 CrGJ Comp at cost 20,00014,000 DrGJ Accum deprec 12,000 2,000 DrGJ Date Account Titles DebitCredit 1/2/X2 General Journal Being entry required to close the disposal account and record the loss Disposal (Computers) 2,000 Loss on disposal 2,000 Lets post to the disposal account Loss on disposal 2,000NILGJ

14. Disposal Ch9B - Disposal14 The same steps are followed in the following cases: Asset is sold for more than the book value, which would result in a gain on disposal Asset is written off, which would result in a loss on disposal equal to the book value Asset is damaged and an insurance claim is received, which would result in a loss/gain on disposal (difference between the book value and the insurance claim) Asset is traded in for a new asset, which would result in a loss/gain on disposal (difference between the book value and the trade-in value)