Chapter 5: Disposal of Capital Assets

Question 1

Give the two reasons why a disposal account is used.

Answer 1

1. To remove the existing balances relating to the asset we are disposing of.
2. To calculate whether a profit or loss has been made on the disposal.

Question 2

What are the steps and the entries to account for the disposal of a non-current asset?

Answer 2

1. Remove the original cost
Dr Disposals
Cr Non-current asset cost

2. Remove the accumulated depreciation
Dr Non-current asset accumulated depreciation
Cr Disposals

3. Record the sale proceeds
Dr Bank
Cr Disposals

Question 3

What are the steps and the entries to account for the part-exchange of a non-current asset?

Answer 3

1. Remove the original cost
Dr Disposals
Cr Non-current asset cost

2. Remove the accumulated depreciation
Dr Non-current asset accumulated depreciation
Cr Disposals

3. Record the part exchange allowance
Dr Non-current asset cost
Cr Disposals

4. Account for the remaining payment
Dr Non-current asset cost
Cr Bank

Question 4

What are the steps and the entries to account for the part-exchange of a non-current asset?

Question 5

What impact does a disposal have on the statement of financial position?

Answer 5

There will be no balance on the statement of financial position that relate to the disposed asset.

Question 6

What impact does a disposal have on the statement of profit or loss?

Answer 6

If a profit is calculated on the disposal it will be an item of income, if a loss is calculated it will be an item of expense.