new alex socratous disposal of fixed...

Alex Socratous

Disposal of Fixed Assets

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 C: Recording of Disposal of

Fixed Assets

Section B: Gain/Loss on Disposal

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K-W-L (Worksheet):

What I Know What I Want What I

(K) to Know (W) Learned (L)

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Section A – Reasons for disposal

^&*?#$

MR BUBU

WHEN DO YOU DISPOSE OF

FIXED ASSETS?

sec A sec B sec Cquit

SCENARIO

HELP MR BUBU TO DECIDE ON WHAT HE SHOULD

DO WITH HIS COMPUTER.

GIVE REASONS FOR

YOUR DECISION.


quitsec A sec B sec C

SCENARIO

HELP MR BUBU TO DECIDE ON WHAT HE SHOULD

DO WITH HIS DELIVERY

VAN. GIVE REASONS FOR

YOUR ACTION.



Main reasons for the disposal of fixed

asset in business are:


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Frequent breakdowns

High costs of repairs and maintenance

Obsolescence

sec A sec B sec 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

Value cost depreciation



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.

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PROFIT/(LOSS) ON DISPOSAL =SELLING PRICE – NET BOOK VALUE

sec A sec B sec C

SELLING PRICE

OF DELIVERY VAN

Profit on Disposal of Asset occurs

when:

NET BOOK VALUE

OF DELIVERY VAN

>

>

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sec A sec B sec C

Loss on Disposal of Asset occurs

when:

SELLING PRICE

OF DELIVERY VAN

NET BOOK VALUE

OF DELIVERY VAN

<

<

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sec A sec B sec 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…

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sec A sec B sec C

Time Line

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I Jan

2001

IN

OU

T$20,000

$15,000

31 Dec

2001

sec A sec B sec C

31 Dec

2002

Depreciation 20% per annum

$4,000 $4,000

Cost Price

Selling Price

Cost Price x Rate x Usage

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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 B sec C

What will happen if BUBU changes the rate of

depreciation to:

(a) 10% per annum?

(b) 50% per annum?

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Cost Price

- Provision

COST PRICE USAGE RATE NBV GAIN/LOSS

$20,000 2 years 20% $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 B sec C

COST PRICE USAGE RATE NBV GAIN/(LOSS)

$20,000 2 years 20%

$20,000 2 years 50% 0 $15,000

$20,000 2 years 10% $16,000

SP

$15,000

$15,000

$15,000

$3,000$12,000

($1,000)

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Section B – Profit/Loss on DisposalCost price –

Provision for

depreciation

Provision for

depreciation

$8,000

$10,000

$4,000

SP - NBVCost Price x Rate x Usage

sec A sec B sec 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

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sec A sec B sec C

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


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


Workings


PARTICULARS

JOURNAL

ENTRIES: General Journal

DATE DEBIT CREDIT

2002 $ $

STEP 1

4,000

4,000

Depreciation of vehicle

Provision for depreciation of

vehicle

(Being depreciation of delivery van

for the second year)

Dec 31

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For this second year only

$20,000 x 20%

sec A sec B sec CWorkings

Depreciation


PARTICULARS

General Journal

DATE DEBIT CREDIT

$ $

STEP 2a

2002

20,000

20,000

Disposal of vehicle

Vehicle

(Being transfer of delivery van sold

to Disposal Account)

Dec 31

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At Cost Price

sec A sec B sec CWorkings

Transfer AJOURNAL

ENTRIES:


General Journal

DATE DEBIT CREDIT

$ $

STEP 2b

PARTICULARS

2002

8,000

8,000

Provision for depreciation of

vehicle

Disposal of vehicle

(Being transfer of accumulated

depreciation of delivery van to

Disposal Account)

Dec 31


?

?

Calculation?

Workings

Transfer BJOURNAL

ENTRIES:


General Journal

DATE DEBIT CREDIT

$ $

STEP 3

PARTICULARS

2002

Bank

Disposal of vehicle

(Being cash received from disposal

of delivery van)

Dec 31 15,000

15,000


Workings

What you receive?JOURNAL

ENTRIES:


General Journal

DATE DEBIT CREDIT

$ $

STEP 4

PARTICULARS

2002

3,000

3,000

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


Workings

Profit/Loss?JOURNAL

ENTRIES:


General Journal

DATE DEBIT CREDIT

$ $

STEP 5a

PARTICULARS

2002

4,000

4,000

Profit & Loss Account

Depreciation of vehicle

(Being closing of depreciation to

Profit and Loss Account)

Dec 31


Workings

Closing AJOURNAL

ENTRIES:

Section C – WITH DISPOSAL A/CLEDGER

ENTRIES:

Vehicle Account

$ $


Dec 31 20,000Disposal of

vehicle

2002

At Cost Price

2001

Bank 20,000Jan 1

2001

2002

Balance b/d 20,000Jan 1

Dec 31 20,000Balance c/d

Any purchase or sales of fixed assets are recorded

at the ORIGINAL COST of the asset

3 4 5 6 721

1IN (BUY) OUT (SELL)

Show how you would record

in the firm’s book for 2 years


Depreciation on Vehicle Account

2001 $ $2001

Provision for

depreciation

4,000Dec 31


4,000Profit & Loss

A/c

Dec 31

2002

Provision for

depreciation

4,000Dec 31

2002

4,000Profit & Loss

A/c

Dec 31

$20,000

x 20%

LEDGER

ENTRIES:

3 4 5 6 721

2


Provision for Depreciation of Vehicle Account

2001 2001$ $

8,000

8,000 8,000


Dec 31 Depreciation 4,000Dec 31 Balance c/d 4,000

2002

4,000Balance b/dDec 31

2002

Disposal of

vehicle

Dec 31

4,000Dec 31 Depreciation

$20,000

x 20%

LEDGER

ENTRIES:

3 4 5 6 721

3

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


sec A sec B sec C

LEDGER

ENTRIES:

3 4 5 6 721quit


Disposal of Vehicle Account

2002 2002$ $

Vehicle 20,000Dec 31

23,00023,000


8,000Provision for

depreciation

Dec 31

Bank 15,000Dec 31

Profit & Loss 3,000Dec 31

LEDGER

ENTRIES:

3 4 5 6 721

4


Bank Account

$


LEDGER

ENTRIES:

3 4 5 6 721

5

Vehicle 20,000Jan 1

2001

Bank Account

2002 $

Disposal of

vehicle

15,000Dec 31

Profit and Loss for the year ended 31 Dec 2001

2001 $

Depreciation

of vehicle

4,000Dec 31



LEDGER

ENTRIES:

3 4 5 6 721

7

Profit and Loss for the year ended 31 Dec 2002

2002 2002$ $

Depreciation

of vehicle

4,000Dec 31 3,000Disposal of

Vehicle

Dec 31

Lessons Learnt

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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 B sec C

DISPOSAL OF FIXED ASSETS

DEBIT CREDITSteps

Lessons Learnt

Bank (cash received)3

Disposal of fixed asset

Fixed asset (trade in) Disposal of fixed asset

Disposal of fixed asset Fixed Asset

Provision for depreciation Disposal of fixed asset2

1 Provision for depreciationDepreciation


Depreciation

Transfer

Receive?

Lessons Learnt

DISPOSAL OF FIXED ASSETS

DEBIT CREDITSteps

4Disposal of fixed asset(If Loss) Profit & Loss

Disposal of fixed asset (If Profit) Profit & Loss

5Profit & Loss A/C Depreciation of FA


Profit/Loss?

Closing

Lessons Learnt

5 STEPS to RECORD DISPOSAL OF

FIXED ASSETS

(1) Depreciation

(2) Transfer

(3) Received?

(4) Profit/Loss?

(5) Closing


micro

teachings

Prepared by

Alex Socratous

For My High School Students

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