When a business entity dispose of its fixed assets or more commonly now referred to as property, plant and equipment, the carrying amount or the net book value of the assets concerned is deducted from the proceeds received at the date of disposal to determine the gain or loss on disposal:- $ Proceeds from disposal XXXX Carrying amount or net book value of fixed assets (XXXX) Gain/(Loss) on disposal XXXX/(XXXX) Example The financial period of ABC Co. Ltd. is from 1 January to 31 December. On 1 February 2006, ABC Co. Ltd paid cash to purchase a motor vehicle costing $24,000. The depreciation rate applied to this motor vehicle is 20% per annum (I will have a detailed discussion on depreciation in my future post). On 1 February 2007, ABC Co. Ltd decided to dispose this motor vehicle and sold it for $16,000. The depreciation of this motor vehicle is calculated as follows:- Cost of motor vehicle = $24,000 Depreciation rate = 20% Depreciation charge per month = $24,000 X 20% X 1/12 = $400 Financial Year Ended 31 December 2006 The relevant double entries are:- Balance Sheet Income Statement DR CR DR CR Motor vehicle - Cost 24,000 Cash at bank 24,000 Balance Sheet Income Statement DR CR DR CR Depreciation - Motor vehicle *4,400 Motor vehicle – Accumulated depreciation 4,400 *Depreciation is for the period from 1 February 2006 to 31 December 2006, i.e. 11 months. Therefore, total amount of depreciation is $4,400 ($400 per month X 11 months) The income statement and balance sheet of ABC Co. Ltd. before and after recording Entry 1 and 2 above are shown below:- Income Statement and Balance Sheet of ABC Co. Ltd. Income Statement for the year ended 31 December 2006 $ Sales 109,270 Cost of Sales - 40,875 Gross profit 68,395 Other income: - Rental income 12,000 Operating expenses: - Accountancy fee - 800 Depreciation of property, plant and equipment - 4,400 Donation - 500 Electricity & water - 3,340 Insurance premium - 200 Printing & stationery - 1,697 Rental of premises - 12,000 Salaries - 27,865 Upkeep of office - 3,547 Telephone charges - 1,285 Travelling, petrol & toll charges - 2,648 - 58,282 Net profit for the year 22,113 Retained profits B/F 27,654 Retained profits C/F 49,767 Balance Sheet as at 31 December 2006 $ Non-current assets Property, plant and equipment 19,600 Note 1 Current assets Inventories 5,000 Trade receivables 32,807 Other receivables, deposits & prepayments: Rental receivable 3,000 Rental deposit 3,000 Utility deposit 500 Cash and bank balances 29,023 73,330 Current liabilities Trade payables - 3,588 Other payables and accruals - 46,688 - 50,276 Net current assets 23,054 42,654 Financed by: - Share capital 15,000 Retained profits 27,654 42,654 Note 1: The breakdown of the property, plant and equipment:- $ Property, plant and equipment - Motor vehicle Cost 24,000 Accumulated depreciation - 4,400 Carrying amount 19,600 Financial Year Ended 31 December 2007 The relevant entries for the financial year ended 31 December 2007: - Balance Sheet Income Statement DR CR DR CR Depreciation - Motor vehicle 400 Motor vehicle – Accumulated depreciation 400 Balance Sheet Income Statement DR CR DR CR Cash at bank 16,000 400 Motor vehicle – Accumulated depreciation 4,800 Motor vehicle – Cost 24,000 Loss on disposal of motor vehicle 3,200 The relevant "T" accounts shown below provide a clearer picture of the relevant figures involved in respect of the depreciation and disposal of the motor vehicle:- ABC Co. Ltd General Ledger Motor Vehicle - Cost (Balance Sheet) DEBIT CREDIT Date Descriptions Folio $ Date Descriptions Folio $ 2006 2006 01-Feb Cash at Bank 24,000.00 31-Dec Balance C/F 24,000.00 24,000.00 24,000.00 2007 2007 01-Jan Balance B/F 24,000.00 01-Feb Loss on disposal of motor vehicle 24,000.00 24,000.00 24,000.00 Motor Vehicle - Accumulated Depreciation (Balance Sheet) DEBIT CREDIT Date Descriptions Folio $ Date Descriptions Folio $ 2006 2006 31-Dec Balance C/F 4,400.00 28-Feb 400.00 31-Mar Depreciation of motor vehicle 400.00 30-Apr Depreciation of motor vehicle 400.00 31-May Depreciation of motor vehicle 400.00 30-Jun Depreciation of motor vehicle 400.00 31-Jul Depreciation of motor vehicle 400.00 31-Aug Depreciation of motor vehicle 400.00 30-Sep Depreciation of motor vehicle 400.00 31-Oct Depreciation of motor vehicle 400.00 30-Nov Depreciation of motor vehicle 400.00 31-Dec Depreciation of motor vehicle 400.00 4,400.00 4,400.00 2007 2007 01-Feb Loss on disposal of motor vehicle 4,800.00 01-Jan Balance B/F 4,400.00 31-Jan Depreciation of motor vehicle 400.00 4,800.00 4,800.00 Motor Vehicle - Accumulated Depreciation (Income Statement) DEBIT CREDIT Date Descriptions Folio $ Date Descriptions Folio $ 2006 2006 28-Feb Depreciation of motor vehicle 400.00 31-Dec To income statement 4,400.00 31-Mar Depreciation of motor vehicle 400.00 30-Apr Depreciation of motor vehicle 400.00 31-May Depreciation of motor vehicle 400.00 30-Jun Depreciation of motor vehicle 400.00 31-Jul Depreciation of motor vehicle 400.00 31-Aug Depreciation of motor vehicle 400.00 30-Sep Depreciation of motor vehicle 400.00 31-Oct Depreciation of motor vehicle 400.00 30-Nov Depreciation of motor vehicle 400.00 31-Dec Depreciation of motor vehicle 400.00 4,400.00 4,400.00 2007 2007 01-Jan Depreciation of motor vehicle 400.00 31-Jan To income statement 400.00 400.00 400.00 Loss on Disposal of Motor Vehicle (Income Statement) DEBIT CREDIT Date Descriptions Folio $ Date Descriptions Folio $ 2007 2007 01-Feb Motor vehicle - Cost 24,000.00 01-Feb Motor vehicle - Accumulated depreciation 4,800.00 01-Feb Cash at bank 16,000.00 31-Dec To income statement 3,200.00 24,000.00 24,000.00 The income statement and balance sheet of ABC Co. Ltd. before and after recording Entry 1 and 2 above are shown below:- Income Statement and Balance Sheet of ABC Co. Ltd. Income Statement for the year ended 31 December 2007 $ Sales 159,270 Cost of Sales - 90,875 Gross profit 68,395 Other income: - Rental income 22,500 Operating expenses: - Accountancy fee - 800 Depreciation of property, plant and equipment - 400 Donation - 500 Electricity & water - 3,340 Insurance premium - 200 Loss on disposal of motor vehicle - 3,200 Printing & stationery - 1,697 Rental of premises - 12,000 Salaries - 35,579 Upkeep of office - 3,547 Telephone charges - 1,285 Travelling, petrol & toll charges - 2,648 - 65,196 Net profit for the year 25,699 Retained profits B/F 27,654 Retained profits C/F 53,353 Balance Sheet as at 31 December 2007 $ Non-current assets Property, plant and equipment - Current assets Inventories 5,200 Trade receivables 6,000 Other receivables, deposits & prepayments: Rental deposit 3,000 Utility deposit 500 Cash and bank balances 82,652 97,352 Current liabilities Trade payables - 3,588 Other payables and accruals: Other payables - 25,411 - 28,999 Net current assets 68,353 68,353 Financed by: - Share capital 15,000 Retained profits 53,353 68,353 Depreciation of motor vehicle
Thursday 17 January 2008
Various Types of Transactions – Part 4d, Collection from Other Source of Revenue and Income (Proceeds from Disposal of Assets)
To record the purchase of motor vehicle on 1 February 2006
To record depreciation of motor vehicle from the date of acquisition (1 February 2006) to the end of the financial year (31 December 2006)
To record the depreciation of motor vehicle from the beginning of the financial year (1 January 2007) to the date of disposal (1 February 2007)
To record the disposal of motor vehicle and recognise the loss on disposal
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