Disposal_of_Foxed_Assets

DISPOSAL OF FIXED ASSETS A company will hopefully update its fixed assets from time to time, to perhaps improve performance, output or quality, and may use retained profits from previous years trading to finance expansion or growth. This week we are looking into the correct accounting treatment when a company sells of one of its fixed assets. It is important to remember that when a fixed asset is disposed of: ALL ACCOUNTING ENTRIES RELATED TO THAT ASSET MUST BE REMOVED FROM THE ACCOUNTS. When a fixed asset is disposed of, it is unlikely that the proceeds from sale will be equal to the value of the fixed asset in the balance sheet (the net book value). The difference between the net book value and the sale proceeds will be either a profit or a loss on the disposal of a fixed asset. Profit – this will occur where the net book value is lower than the sale proceeds and will come under the heading “sundry income” as profit on sale of fixed asset on the profit and loss. Loss – this will occur where the net book value is higher than the sale proceeds and will appear as an “expense” as loss on sale of fixed asset in profit and loss account. Steps to disposing of a fixed asset: Firstly open a “disposals” T Account (this will record all the double entries to removing the asset from the accounts), then: Step 1 – Remove the original cost of the disposed asset from the asset account (i.e. credit the asset account and debit the disposals account) Step 2 – Remove the provision for accumulated depreciation of the disposed asset from the accumulated depreciation account (i.e. debit the accumulated depreciation account and credit the disposals account) Step 3 – Enter the sale proceeds received/receivable for the disposed asset into the bank or cash account (i.e. debit the bank and credit the disposals) Step 4- Balance off the disposals account to determine profit or loss on sale. CLASS EXAMPLE Veronica has a motor vehicle with a net book value of £2,800. The motor vehicle had originally cost £7,000. Veronica sells the asset for £3,000 cash. Required Show the journal entries to dispose of the fixed asset above and calculate the profit or loss on the disposal of the fixed asset. Although you’re not specifically told, you can work out that accumulated depreciation to date is £4,200 by a process of clever mathematics!! £ £ Step 1: Dr Disposal account 7,000 Cr Motor vehicles cost account 7,000 Step 2: Dr Pro/n for accum dep’n - MV 4,200 Cr Disposal account 4,200 Step 3: Dr Cash 3,000 Cr Disposal account 3,000 ----------------------------------------Disposal---------------------------------- Motor vehicles 7,000 Accum dep’n 4,200 Profit on disposal 200 Cash 3,000 7200 7200 Step 4: Balancing off the disposals account. Here we can see that the balancing figure is £200 on the debit side, the double entry would be a credit entry on the profit and loss thus meaning a profit. PART EXCHANGE You may come across a situation where instead of selling a fixed asset for cash, an old asset is taken by the supplier in part exchange for a new asset. A cheque or cash may be paid for the net cost of the new asset, after offsetting the part exchange value of the old asset (although other means of financing the purchase could of course be used). The part ex allowance is entered into the asset account (dr) and then the remainder of the new asset purchase price is debited so that the total amount of the new asset is recorded as follows: Journals for part exchange £ £ Step 1 Dr Disposal account X Cr Fixed asset cost account X Step 2 Dr Prov/n for accum depn X Cr Disposal account X Step 3 Dr Fixed asset cost account X (with part exchange value) Cr Disposal account X Step 4 Dr Fixed asset cost account X (with net cost) Cr Bank X CLASS EXAMPLE During the year Sarah part exchanged a machine that had originally cost £20,000 and had accumulated depreciation of £17,000. The new machine cost £15,000 and a cheque for £14,000 was written for the remaining balance. Required Prepare the journal entries to account for the disposal and purchase of assets and write up the disposal account to calculate the profit or loss on disposal. £ £ Step 1 Dr Disposal account 20,000 Cr Machine cost account 20,000 Step 2 Dr Accum dep’n - machines 17,000 Cr Disposal account 17,000 Step 3 Dr Machine cost account (part ex) 1,000 Cr Disposal account 1,000 Step 4 Dr Machine cost account (net cost) 14,000 Cr Cash 14,000 Disposal Machine 20,000 Accum dep’n machine 17,000 Part exchange 1,000 Loss on disposal 2,000 20,000 20,000 PART-EXCHANGE WITH VAT You may be asked to deal with a situation where a business registered for VAT disposes of a fixed asset to a supplier in part exchange for a new asset. As previously, a cheque/cash is paid for the net cost of the new asset, after offsetting the part exchange value of the old asset. It is important that the new asset is recorded at its full cost, not the net amount for which a cheque/cash is paid, and also excluding VAT. Similarly, the gross part-exchange value of the fixed asset disposed of should be split between net sale proceeds and output VAT. Note that, in the year of disposal, the cost of the fixed asset disposed of will be exclusive of VAT in the accounting records. The split of the gross cost between fixed asset cost and input VAT would have been done in a previous year when it was first purchased. Journals for part-exchange of fixed assets with VAT £ £ Step 1 Dr Disposal account X (as normally) Cr Fixed asset cost account X Step 2 Dr Provn for accum depn X (as normally) Cr Disposal account X Step 3 Dr Fixed asset X Dr VAT (input VAT) X Cr Creditors X (Account for full cost of new fixed asset split between cost & input VAT) Step 4 Dr Creditors X Cr VAT (output vat) X Cr Fixed asset disposals X (Account for gross part-ex value received on fixed asset disposed – split between disposal value and output VAT Step 5 Dr Creditors X Cr Cash X (Make net payment to conclude the transaction) CLASS EXAMPLE During the year Fernando disposed of a van in part exchange for a new van. This van had originally cost £15,000 plus VAT at 17.5% several years ago and had accumulated depreciation of £12,750. The new van cost £20,000 plus VAT at 17.5%. The gross part-exchange allowance including VAT was £4,935. A cash settlement was paid for the net amount outstanding. Required Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal. £ £ Step1 Dr Disposal account 15,000 (as normally) Cr Fixed asset cost account 15,000 Step 2 Dr Prov/n for accum depn 12,750 (as normally) Cr Disposal account 12,750 Step 3 Dr Fixed asset 20,000 Dr VAT (input VAT) 3,500 Cr Creditors 23,500 (Account for the gross cost of the new fixed asset purchased – split between asset cost and input VAT) Step 4 Dr Creditors 4,935 Cr VAT (output vat) 735 Cr Fixed asset disposals 4,200 (Account for the gross part-exchange value received on the fixed asset disposed – split between disposal value and output VAT) Step 5 Dr Creditors 18,565 Cr Cash 18,565 (Make net payment to conclude the transaction) Disposals Account Asset cost 15,000 Prov Acc Depn 2,750 Profit on disposal 1,950 Part Ex value 4,200 16,950 16,950 Question 1 A business has fixtures and fittings which were originally purchased on 1 May 2000 for £8,400. These fixtures and fittings were sold on 1 December 2001 for £6,000 having been depreciated at 15% straight line. (a) What would be the net book value of the fixtures and fittings on the date of disposal if the depreciation is calculated on a monthly basis' (b) What would be the amount of profit or loss on disposal of the fixtures and fittings' Question 2 A company buys a car for £16,000 and expects it to have a useful life of five years. It depreciates the car at 40% reducing balance and sells it after three years for £3,000. Write up the disposal account clearly showing any profit or loss on disposal. Question 3 During the year Sarah sold a machine that had originally cost £20,000 for £3,000. At the date of sale the asset's accumulated depreciation was £15,000. Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal. Question 4 Bob sold a car that had been purchased for £25,500. Depreciation on motor vehicles is calculated at 25% on a straight-line basis. The car was owned for 3 years before it was sold. Sale proceeds were £1,500. Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal. Question 5 A building that had depreciation for ten years at 2% on cost was sold during the year for £50,000. Its original purchase price was £43,000. Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal. Question 6 Bob part exchanged a car at a trade in value of £2,500. The car originally cost £24,000 and had been depreciated for 4 years at 10% on cost. The new vehicle's full cost was £27,000. Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal. Question 7 During the year Jamie disposed of a fixed asset in part exchange for a new fixed asset. This asset had originally cost £30,000 plus VAT at 17.5% several years ago and had accumulated depreciation of £18,800. The new fixed asset cost £35,000 plus VAT at 17.5%. The gross part-exchange allowance including VAT was £9,400. A cash settlement was paid for the net amount outstanding. Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal. Question 8 A business purchased a car for £15,800 on 1 May 2002. The car is depreciated on the straight line basis with an estimated useful life of four years and an estimated residual value of £3,800. On 31 December 2004 the car was taken in part exchange for a new car at a part exchange value of £5,000. The balance for the new car was settled with a cheque for £12,000. The new car has an estimated useful life of four years and an estimated residual value of £7,000. A full year’s depreciation is charged in the year of purchase but no depreciation in the year of sale. Write up the following ledger accounts for the year ending 30 June 2005: (i) car at cost account (ii) car – accumulated depreciation account (iii) disposal account. Question 9 A business has the following transactions relating to its plant and machinery: • 1 January 2002 Machine DC4 purchased for £24,000. This is to be depreciated on a straight line basis over its useful life of five years with an estimated residual value of £4,000. • 1 July 2002 Purchased Machine GE3 for £32,000. This is to be depreciated on a straight line basis over eight years with an estimated residual value of £2,000. • 31 January 2003 Purchased Machine HL8 for £55,000. This is to be depreciated on a straight line basis over five years with an estimated residual value of £5,000. • 31 July 2003 Part exchanged Machine DC4 for Machine DC5. The manufacturer gave the business a part exchange value of £12,000 for Machine DC4 against the agreed total price for Machine DC5 of £28,000. The DC5 is to be depreciated on the straight line basis over a useful life of four years with an estimated residual value of £8,000. • 31 December 2003 Sold Machine GE3 for £20,000. Purchased a replacement Machine KR6 for £30,000. This is to be depreciated on a straight line basis over its useful life of six years with an estimated residual value of £1,500. The accounting year end is 30 June. The accounting policy is to charge a full years’ depreciation in the year of purchase but none in the year of sale. Task (a) Write up the plant and machinery at cost account, the provision for depreciation account and the disposal accounts for the years ending 30 June 2002, 30 June 2003 and 30 June 2004. (Produce a separate disposal account for each machine disposed of.) (b) Show extracts from the balance sheets at 30 June 2002, 30 June 2003 and 30 June 2004 for plant and machinery. ANSWERS: Question 1 (a) Annual depreciation charge = £8,400 × 15% = £1,260 Cost 8,400 Less: depreciation (1,260 ÷ 12 x 19) (1,995) Net book value =6,405 (b) Loss on disposal = £6,405 – £6,000 = £405 Question 2 Cost 16,000 Year 1 depreciation (16,000 × 40%) (6,400) therefore Net book value 9,600 Year 2 depreciation (9,600 × 40%) (3,840) therefore Net book value 5,760 Year 3 depreciation (5,760 × 40%) (2,304) therefore Net book value 3,456 Disposal account Asset at cost 16,000 Accumulated depreciation (6,400 + 3,840 + 2,304) 12,544 Proceeds – Bank 3,000 Loss on disposal 456 16000 16000 Question 3 £ £ Dr Disposal account 20,000 Cr Machine cost account 20,000 Dr Pro/n for accum dep’n – machine 15,000 Cr Disposal account 15,000 Dr Cash 3,000 Cr Disposal account 3,000 Disposal Machine 20,000 Accum dep’n machine 15,000 Cash 3,000 Loss on disposal 2,000 20,000 20,000 Question 4 £ £ Dr Disposal account 25,500 Cr Motor vehicles cost account 25,500 Dr Accum dep’n - MV – 3 × (£25,500 × 25%) 19,125 Cr Disposal account 19,125 Dr Cash 1,500 Cr Disposal account 1,500 Disposal Motor vehicle 25,500 Accum dep’n MV 19,125 Cash 1,500 Loss on disposal 4,875 25,500 25,500 Question 5 £ £ Dr Disposal account 43,000 Cr Buildings cost account 43,000 Dr Accum dep’n - buildings 8,600 Cr Disposal account 8,600 Dr Cash 50,000 Cr Disposal account 50,000 Disposal Building 43,000 Accum dep’n building 8,600 Cash 50,000 Gain on disposal 15,600 58,600 58,600 Question 6 £ £ Dr Disposal account 24,000 Cr Motor vehicle cost account 24,000 Dr Accum dep’n - MV 9,600 Cr Disposal account 9,600 Dr Motor vehicle cost account (trade in) 2,500 Cr Disposal account 2,500 Dr Motor vehicle cost account (net cost) 24,500 Cr Cash 24,500 Disposal Motor vehicles 24,000 Accum dep’n MV 9,600 Trade in 2,500 Loss on disposal 11,900 24,000 24,000 Question 7 £ £ 1 Dr Disposal account 30,000 (as normally) Cr Fixed asset cost account 30,000 2 Dr Prov/n for accum depn 18,800 (as normally) Cr Disposal account 18,800 3 Dr Fixed asset 35,000 Dr VAT (input VAT) 6,125 Cr Creditors 41125 4 Dr Creditors 9400 Cr VAT (output vat) 1400 Cr Fixed asset disposals 8000 (Account for the gross part-exchange value received on the fixed asset disposed – split between disposal value and output VAT) 5 Dr Creditors 31725 Cr Cash 31725 (Make net payment to conclude the transaction) Disposal of fixed asset Asset cost 30,000 Prov Acc Depn 18,800 Part Ex value 8000 Loss on disposal 3200 30,000 30,000 Question 8 Depreciation charge – old car = £15,800 − £3,800 ÷ 4 = £3,000 per annum Depreciation charge – new car = £17,000 − £7,000 ÷ 4 = £2,500 per annum Car at cost Balance b/d 15,800 Disposal 15,800 Trade In 5,000 bank 12,000 32,800 32,800 Car accumulated depreciation Disposal 9,000 Balance b/d (3,000 × 3) 9,000 Balance c/d 2,500 Depreciation expense – new car 2,500 11,500 11,500 Disposal account Car at cost 15,800 Accumulated depreciation 9,000 Proceeds – part exchange 5,000 Loss on disposal 1,800 15,800 15,800 Question 9 Plant and machinery at cost 1 Jan 02 Machine DC4 24,000 1 July 02Machine GE3 32,000 1 Jan 03Machine HL8 55,000 111,000 111,000 1 July 03Balance b/d 111,000 31 July 03Machine DC5 28,000 31 July Disposal DC4 24,000 31 Dec 03Machine KR6 30,000 31 July Disposal GE3 32,000 30 June Balance c/d 113,000 169,000 169,000 20X4 1 July Balance b/d 113,000 Provision for depreciation 30 June 02 Balance c/d 4,000 30 June 02 Depreciation DC4 4,000 4,000 4,000 1 July 02 Balance b/d 4,000 30 June 03 Depreciation DC4 4,000 GE3 (32,000 – 2,000/8) 3,750 30 June 03Balance c/d 21,750 HL8 (55,000 – 5,000/5) 10,000 21,750 21,750 1 July 03Balance b/d 21,750 31 July 03 Disposal DC4 8,000 30 June Depreciation HL8 10,000 31 Dec 03 Disposal GE3 3,750 DC5 (28,000 – 8,000/4) 5,000 30 June 04 Balance c/d 29,750 KR6 (30,000 – 1,500/6) 4,750 41,500 41,500 2004 1 July Balance b/d 29,750 Disposal account – DC4 31 July 03 Cost 24,000 31 July Accumulated deprn 8,000 31 July Part exchange 12,000 30 June Loss on disposal 4,000 24,000 24,000 Disposal account – GE3 31 Dec Cost 32,000 31 Dec Accumulated deprn 3,750 31 Dec Bank 20,000 30 June Loss on disposal 8,250 32,000 32,000 (b) Balance sheet extracts Cost Provision for depreciation Net book value £ £ £ 30 June 20X2 Plant and machinery 24,000 4,000 20,000 30 June 20X3 Plant and machinery 111,000 21,750 89,250 30 June 20X4 Plant and machinery 113,000 29,750 83,250