6. Non-current Asset Disposals

Question 1

How is the disposal of a non-current asset accounted for 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.

In the statement of profit and loss, profits may be presented as other income or, netted off against the relevant expense category, and losses are reported as administrative expenses or distribution costs of the business, neither as part of gross profit.

Question 2

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

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

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

Answer 4

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/trade payable account
   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 5

What is the part exchange of an asset?

Answer 5

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.

Question 6

Define the part-exchange allowance of an asset being exchanged

Answer 6

The cost of the new asset minus the additional cash or credit paid for the new item

Question 7

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

Answer 7

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 - New asset cost account
   Credit - Disposal account
   With the part-exchange allowance
4. Debit - New asset cost account
   Credit - Bank/trade payables
   With the remaining balance after the part exchange allowance has been deducted