6. Non-current Asset Disposals

Question 1

How does the disposal of a non-current asset appear in the financial statements?

Answer 1

Non-current assets might be sold at some stage during their life, either when their useful life is over or before then.
When an asset is sold, it no longer has the potential to produce economic benefits and therefore does not meet the conceptual framework definition of an asset.
It must therefore be derecognised (removed) from the financial statements. On derecognition, both the cost and accumulated depreciation associated with the non-current asset must be removed from the financial statements.

Whenever a business sells something, it will make a profit or a loss. When non-current assets are disposed of, there will be a profit or loss on disposal.
As it is a capital item being sold, the profit or loss will be capital income or capital expense.
Profits may be presented as other income or, netted off against the relevant expense category.
Losses are reported as administrative expenses or distribution costs in the statement of profit or loss of the business, not as part of gross profit.
They are commonly referred to as ‘profit (or loss) on disposal of non-current assets’.

**In the long form questions in the ‘Accounting’ exam, you will be told how to present any profit or loss on disposal of non-current assets. Read the information in the question carefully to ensure you apply the correct presentation.

Question 2

How is the profit or loss on the disposal of a non-current asset calculated?

When is a profit/loss made?

Answer 2

The profit or loss on the disposal of a non-current asset is the difference between:
1. The carrying amount of the asset at the time of its sale; and
2. Its net proceeds: the amount received less any costs of making the sale.

A profit is made when the net disposal proceeds exceed the carrying amount.

A loss is made when the net disposal proceeds are less than the carrying amount.

Question 3

How is the profit/loss on disposal of an asset recorded in the financial statements?

Answer 3

Profit will be shown in the statement of profit or loss as an item of other income, added to the gross profit to arrive at net profit.

Loss will be shown as part of the administrative expenses in the statement of profit or loss of the business. It is a capital expense, not a trading loss, and it should not therefore be part of the calculation of gross profit.

Question 4

How are non-current asset disposals accounted for?

What items appear in the disposals account? (3)

What is the profit or loss on disposal?

Answer 4

The disposal of non-current assets is recorded in a disposals ledger using journal entries.

The following items appear in the disposals account:
1. The cost of the asset
2. The accumulated depreciation up to the date of sale
3. The disposal proceeds, if any

The profit or loss on disposal is the difference between:
1. The disposal proceeds; and
2. The carrying amount of the asset at the time of disposal.

Question 5

What journal entries are required to account for the disposal of non-current assets?

Answer 5

1. Debit - Disposal account
   Credit - NCA cost account
   With the cost of the asset disposed of (the cost of the asset is removed from the statement of financial position).
2. Debit - Accumulated depreciation account
   Credit - Disposal account
   With the accumulated depreciation on the asset as at the date of sale (the accumulated depreciation of the asset is removed from the statement of financial position).
3. Debit - Cash at bank account (or receivables)
   Credit - Disposal account
   With the disposal proceeds of the asset.
   The balance on the disposal account is the profit or loss on disposal and the corresponding double entry is recorded in the profit and loss ledger accounts itself, i.e., in the statement of profit or loss.

Question 6

What is the disposal value for an asset that is sold in part-exchange?

Answer 6

Quite often a business does not receive cash for the asset, but instead get a ‘part exchange’ or ‘trade-in value’ for it against the cost of a new asset. Instead of disposal proceeds being received in the form of cash or promised in the form of a receivable, use the part-exchange value given to the asset by the other party as its disposal value.