Disposal of a non-current asset

Question 1

Prior to disposing a NCA…

Answer 1

Always update depreciation/acc dep accounts for current period before proceeding to dispose

Question 2

4 step process (sale of NCA)

Answer 2

1. Remove the cost of the asset from the general ledger
   - Dr disposal of asset, Cr asset
2. Remove acc dep from general ledger
   - Dr acc dep, Cr disposal of asset
3. Record the proceeds of sale (cash or trade-in) into general ledger
   - Dr cash at bank, Cr disposal of asset
4. Record the profit or loss on disposal of asset
   - Dr loss on disposal of asset, Cr disposal of asset (if proceeds from sale < CV)
   - Dr disposal of asset, Cr profit on disposal of asset (if proceeds from sale > CV)

Question 3

5 step process (trade-in of NCA)

Answer 3

1. Remove the cost of the asset from the general ledger
   - Dr disposal of asset, Cr asset
2. Remove acc dep from general ledger
   - Dr acc dep, Cr disposal of asset
3. Record the proceeds of sale (cash or trade-in) into general ledger
   - Dr asset, Cr disposal of asset
4. Record the profit or loss on disposal of asset
   - Dr loss on disposal of asset, Cr disposal of asset (if proceeds from sale < CV)
   - Dr disposal of asset, Cr profit on disposal of asset (if proceeds from sale > CV)
5. Record the purchase of the new asset
   - Dr asset, Dr GST clearing, Cr cash at bank

Question 4

Reasons for profit on disposal

Answer 4

Occurs due to over-depreciation
- Underestimating useful life of asset
- Underestimating scrap value of asset
- Well maintenance of asset

Question 5

Reasons for loss on disposal

Answer 5

Occurs due to under-depreciation
- Overestimating useful life
- Overestimating scrap value
- Damaged, out of fashion, superseded by new model