Chapter 5 - Disposal of non current assets

Question 1

what happens when the proceeds are greater than the carrying amount

Answer 1

we get a profit on disposal

Question 2

what happens when the proceeds are less than the carrying amount

Answer 2

we get a loss on disposal

Question 3

what is the three step process for dealing with a disposal (step 1/3)

Answer 3

step 1 - as we don’t need the asset we cant show it as an asset, therefore we have to transfer the cost of the asset out of the non current asset account and into a special disposal account
debit - disposal account (this is the account where we calculate profit or loss on disposal)
credit - non current asset cost (this removes the debit that was reflecting the asset)

Question 4

what is the three step process for dealing with a disposal (step 2/3)

Answer 4

step 2 - as we have removed the cost of the the asset we don’t need the accumulated depreciation against that value. we therefore need to remove all the accumulated depreciation that has been charged against the asset
debit accumulated depreciation (as this was a credit balance)
credit disposal account (so we can work out profit or loss on disposal)

Question 5

what is the three step process for dealing with a disposal (step 3/3)

Answer 5

step 3 - post the sale proceeds to the disposal account
debit cash (as we are receiving some money for disposing of it)
credit disposal account ( to compare against the carrying amount already posted there in steps 1 and 2)

Question 6

what is part exchange allowance

Answer 6

when purchasing a new asset instead of paying the full price we may part exchange an old asset as part payment for the new one. the part exchange allowance must be accounted for.

Question 7

how is the part exchange allowance accounted for

Answer 7

add it to the cost of the new asset (as the cash we pay will not be the full price) and this part exchange allowance is effectively the sale proceeds we have got for the old asset so we have to include it in the disposal account

Question 8

what is the journal entry that needs to be made for a part exchange

Answer 8

debit non current asset cost (for the new asset)
credit disposal account (as though sale proceeds)

Question 9

what is the four step process for dealing with the disposal of a part exchanged asset - part 1 /4

Answer 9

step 1 - transfer the cost of the old asset to the disposal account
debit disposal account (P&L)
credit non current asset cost (B/S)

Question 10

what is the four step process for dealing with the disposal of a part exchanged asset - part 2/4

Answer 10

remove all the accumulated depreciation that has been charged on the old asset
debit accumulated depreciation
credit disposal account

Question 11

what is the four step process for dealing with the disposal of an asset - part 3/4

Answer 11

step 3 - although we are not selling the old asset for cash we are still getting some value for it.

the value needs to be brought into the disposal account to help calculate the profit or loss on disposal. however we don’t debit cash (as we are not receiving any) we debit a new non current asset as we are receiving part of the new asset

debit non current asset cost
credit disposal account ( as with step 3 for a normal disposal)

Question 12

What is the four step process for dealing with the disposal of an asset - part 4/4

Answer 12

post the additional cash paid for the new asset we have purchased
debit non current asset cost (to add to the debit in step 3)
credit cash (we are reducing our cash asset)

Question 13

what happens if proceeds are greater than the carrying amount (CA)

Answer 13

we get a profit on disposal. A profit means we have charged too much depreciation in previous years so we will credit the profit on disposal to the P&L account. we credit the sundry income in the statement of profit or loss

Question 14

what is the journal entry for recording a profit on disposal

Answer 14

debit disposal account (balancing figure to balance off the account)
credit profit or loss account (as additional income in our statement of profit or loss)

Question 15

what happens if proceeds are less than the carrying amount (CA)

Answer 15

we get a disposal. a loss means we did not charge enough depreciation in previous years so we will debit the loss to the P&L account. we debit an expense in the statement of profit or loss

Question 16

what is the journal entry for recording a loss on disposal

Answer 16

debit profit or loss account (as an additional expense in our statement of profit or loss)
credit disposal account (balancing figure to balance off the accounts)

Question 17

why do we account for disposals

Answer 17

• to remove the asset cost and accumulated depreciation as we no longer have the asset
• recognize too much or little expense (depreciation) being charges through a profit or loss on disposal

Question 18

what does an accrual do

Answer 18

accruals are expenses which have been incurred by a business during an accounting period but at the period end no invoice has been received so they haven’t been paid yet. Accruals relate to expenses that have been paid in arrears.

Question 18

what is a prepayment

Answer 18

a prepayment arises when we have paid for an item of expense before we have used it. prepayments are expenses paid for in advance.

Question 19

what is the entry to account for an accrual

Answer 19

debit expense (statement of profit or loss) - debit the expense as we have used the goods or services but not paid for them so initially they are understated.

credit accrual (statement of financial position) - credit an accrual account (which is a current liability) because we have not yet paid for the expense, this has the effect of showing a liability on the statement of financial position

Question 20

what is the double entry for prepayments

Answer 20

debit prepayments (statement of financial position - current asset) - we have not used the goods and services we have paid for. This is now an asset of the business as we are owed the service we have paid for in advance

credit expense (statement of profit or loss) - we credit an expense as we need to reduce the total expense. part of the cash paid relates to next years expenses but is currently included in this year. when the cash was paid the full amount would have been a debit to the expense account and a credit to the cash

Question 21

what should be considered with subsequent years regarding accruals and prepayment

Answer 21

we will have an asset or a liability brought forward on the statement of financial position (prepayment or accrual account) at the start of the next year

Question 22

what has to be done to reverse an accrual

Answer 22

debit accrual
credit expense

Question 23

what is the double entry to reverse a prepayment

Answer 23

debit expense
credit prepayment

Question 24

what is the double entry to reverse a prepayment

Answer 24

debit expense
credit prepayment

Question 25

what is the three step process for reversing an accrual or prepayment

Answer 25

step 1 - reverse out last years accrual or prepayment
step 2 - post any cash paid this year
step 3 - post any closing accrual or prepayment

Question 26

what is prepaid income

Answer 26

(aka deferred income) is in accrual accounting money received for goods and services which haven’t been delivered. the business therefore has received some cash but owes the customer for the services to be delivered.

as the service is owed this is a liability on the statement of financial position

Question 27

what is the adjustment for prepaid income

Answer 27

debit sales (profit and loss to reduce the revenue for the period)
credit prepaid income (statement financial position as liability created for the service which is owed)

Question 28

what is accrued income

Answer 28

income earned but not received. This will be asset at the end of the period as the work has been done but income not received. The income will need to be included in the sales for the period in question.

Question 29

what is the double entry for accrued income

Answer 29

debit accrued income (statement of financial position to recognize the asset for the income earned but not received)
credit sales (profit or loss to increase the sales income)

Question 30

what is commissions income

Answer 30

this is accrued income and will be a current asset

Question 31

what is the affect of prepaid income and what is the entry

Answer 31

reduces income in current period. reduces profit in current period. Debit income, credit liability

Question 32

what is the affect of prepaid expenses and what is the entry

Answer 32

reduces expenses in current period. increases profit in current period. Debit asset, credit expense

Question 33

what is the affect of accrued income and what is the entry

Answer 33

increases income in current period, increases profit in current period. Debit asset, credit income