Disposal Of Non-Current Assets

Question 1

When we dispose of an asset we have to compare the __ __ of the asset to the __ we have received from selling the asset.

Answer 1

• Carrying amount
• Proceeds

Question 2

When do we get a profit on disposal?

Answer 2

If proceeds are greater than carrying amount

Question 3

When do we get a loss on disposals?

Answer 3

If proceeds are less than carrying amount

Question 4

Describe the disposal

Answer 4

• The disposal is an accounting adjustment which we do through a journal.
• It is not a ‘real’ profit or loss, it is simply we have charged too much or too little depreciating in the previous years’ accounts.

Question 5

What does a profit mean regarding disposals?

Answer 5

We have charged too much depreciation in previous years (as the value has not fallen as far as we have accounted for) so we will credit the profit on disposal to the profit and loss account.

We credit sundry income in the SPL.

Question 6

What does a loss mean regarding disposals?

Answer 6

It 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 SPL.

Question 7

What’s the double entry for when you transfer the cost of the asset out of the non-current asset account and into a special disposal account?

Answer 7

Dr Disposal account (this is the account where we will work out the profit or loss on disposal)
Cr Non-current asset cost (this takes the debit that was reflecting the asset)

Question 8

What’s the double entry for removing all the accumulated depreciation for an asset disposal?

Answer 8

Dr Accumulated depreciation (as this was a credit balance)
Cr Disposal account (so we can work out the profit and loss on disposal)

Question 9

What’s the double entry for removing all the accumulated depreciation for an asset disposal?

Answer 9

Dr Accumulated depreciation (as this was a credit balance)
Cr Disposal account (so we can work out the profit and loss on disposal)

Question 10

Describe the 3 step processed to dealing with a disposal

Answer 10

Step 1
- Transfer cost of asset out of non-current asset account into special disposal account as we no longer own the asset
- Dr Disposal account, Cr Non-current asset cost
Step 2
- As we have removed the cost of the asset we no longer need an accumulated depreciation against the value and therefore need to remove all accumulated depreciation that has been charged on the asset.
- Dr Accumulated depreciation, Cr Disposal account
Step 3
- Post the sale proceeds to the disposal account as we
- Dr Cash, Cr Disposal account

Question 11

Describe what a part exchange is

Answer 11

Sometimes when we purchase a new asset instead of paying the full price we may part exchange an old asset as part payment for the new one.

This part exchange allowance must be accounted for.

Question 12

How do you account for part exchange allowance?

Answer 12

• 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 sales proceeds we have got for the old asset so we have to include it within the disposal account.

Question 13

What 2 accounts is a part exchange allowance concerned with?

Answer 13

Non-current asset cost and Disposal account

Question 14

What is the double entry for part exchange allowance?

Answer 14

Dr Non-current asset cost (for the new asset)
Cr Disposal account (as though sales proceeds)

Question 15

Describe the 4 step process for dealing with disposal of a part exchanged asset

Answer 15

1. Transfer the cost of the old asset to the disposal account
   - Dr Disposal account (P&L)
   - Cr Non-current asset (B/S)
2. Remove all the accumulated deprecation that has been charged against the old asset
   - Dr Accumulated depreciation (B/S)
   - Cr Disposal account (P&L)
3. Though we aren’t selling the old asset for cash, we are still getting some value for it which needs to be brought into the disposal account to help us calculate the profit or loss on disposal. The only difference is we don’t debit cash but rather a new non-current asset.
   - Dr Non-currents asset cost (to start accounting for new asset)
   - Cr Disposal account Step
   Step 4. Post the additional cash paid for the new asset we have purchased
   - Dr Non-Current asset cost (to add to the debit in step 3)
   - Cr Cash (as we are reducing out cash asst)

Question 16

If proceeds are greater then carrying amount (CA) we get a __ on __.

Answer 16

Profit on disposal

Question 17

What does a profit on disposal mean?

Answer 17

We have charged too much depreciation in previous years so we will credit the profit on disposal to the P&L account. We credit sundry income in the statement of profit and loss.

Question 18

What is the double entry for profit on disposal?

Answer 18

Dr Disposal Account (balancing figure to balance off the account)
Cr Profit or loss account (as additional income in our SPL)

Question 19

If proceeds are less than the carrying amount (CA) we get a __ on __.

Answer 19

Loss on disposal

Question 20

What does a loss on disposal mean?

Answer 20

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 SPL.

Question 21

What’s the journal to record a loss on disposal?

Answer 21

Dr Profit and Loss account (as additional expense in out SPL)
Cr Disposal account (balancing figure to balance off the account)

Question 22

Why do we account for disposals (2)?

Answer 22

• To remove the asset cost and accumulated depreciation as we no longer have the asset.
• Recognise too much or not enough expense (depreciation) being charged through profit or loss on disposal