new alex socratous disposal of fixed...
TRANSCRIPT
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Alex Socratous
Disposal of Fixed Assets
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Introduction
• Objectives:
– State the 3 reasons for disposal
– Recognise and calculate the gain/loss on disposal of fixed assets
– Identify the two methods of recording the disposal of fixed assets
– Record disposal of fixed asset
• Target group: Secondary 3 express
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Contents
Section A: Reasons for Disposal
Section C: Recording of Disposal of
Fixed Assets
Section B: Gain/Loss on Disposal
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K-W-L (Worksheet):
What I Know What I Want What I
(K) to Know (W) Learned (L)
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Section A – Reasons for disposal
^&*?#$
MR BUBU
WHEN DO YOU DISPOSE OF
FIXED ASSETS?
sec A sec B sec Cquit
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SCENARIO
HELP MR BUBU TO DECIDE ON WHAT HE SHOULD
DO WITH HIS COMPUTER.
GIVE REASONS FOR
YOUR DECISION.
Section A – Reasons for disposal
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SCENARIO
HELP MR BUBU TO DECIDE ON WHAT HE SHOULD
DO WITH HIS DELIVERY
VAN. GIVE REASONS FOR
YOUR ACTION.
Section A – Reasons for disposal
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Main reasons for the disposal of fixed
asset in business are:
Section A – Reasons for disposal
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Frequent breakdowns
High costs of repairs and maintenance
Obsolescence
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Section B – Profit/Loss on Disposal
Selling Price = Amount received for the
disposal
When fixed assets are disposed of or
traded in for new assets, the selling prices
are generally different from the book
values of the assets concerned.
Net Book = Price at – Total accumulated
Value cost depreciation
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Section B – Profit/Loss on Disposal
When fixed assets are disposed of or
traded in for new assets, the selling prices
are generally different from the book
values of the assets concerned.
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PROFIT/(LOSS) ON DISPOSAL =SELLING PRICE – NET BOOK VALUE
sec A sec B sec C
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SELLING PRICE
OF DELIVERY VAN
Profit on Disposal of Asset occurs
when:
NET BOOK VALUE
OF DELIVERY VAN
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Section B – Profit/Loss on Disposal
sec A sec B sec C
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Loss on Disposal of Asset occurs
when:
SELLING PRICE
OF DELIVERY VAN
NET BOOK VALUE
OF DELIVERY VAN
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Section B – Profit/Loss on Disposal
sec A sec B sec C
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EXAMPLE 1:Mr. BUBU bought a delivery van on 1 January 2001 for
$20,000. BUBU decides to depreciate the delivery van
at the rate of 20% per annum. On 31 December 2002
due to the high cost of repairs and maintenance, BUBU
sold it for $15,000 to MUMU.
What is the selling price & net book value?
Find the gain/loss on disposal…
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Section B – Profit/Loss on Disposal
sec A sec B sec C
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Time Line
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I Jan
2001
IN
OU
T$20,000
$15,000
31 Dec
2001
sec A sec B sec C
31 Dec
2002
Depreciation 20% per annum
$4,000 $4,000
Cost Price
Selling Price
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Cost Price x Rate x Usage
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Section B – Profit/Loss on Disposal
Selling Price = Amount received for the disposal
= $15,000
Gain/loss on disposal = SP – NBV
= $ 3,000
Net Book Value = Price at - Total accumulated
cost depreciation
$20,000x20%x2
= $20,000 - $8,000
= $12,000
Provision for
depreciation
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What will happen if BUBU changes the rate of
depreciation to:
(a) 10% per annum?
(b) 50% per annum?
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Section B – Profit/Loss on Disposal
Cost Price
- Provision
COST PRICE USAGE RATE NBV GAIN/LOSS
$20,000 2 years 20% $12,000
Provision for
depreciation
$8,000 $3,000
SP - NBV
Cost Price x Rate x Usage
SP
$15,000
$20,000x20%x2 $20,000-$8,000
sec A sec B sec C
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COST PRICE USAGE RATE NBV GAIN/(LOSS)
$20,000 2 years 20%
$20,000 2 years 50% 0 $15,000
$20,000 2 years 10% $16,000
SP
$15,000
$15,000
$15,000
$3,000$12,000
($1,000)
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Section B – Profit/Loss on DisposalCost price –
Provision for
depreciation
Provision for
depreciation
$8,000
$10,000
$4,000
SP - NBVCost Price x Rate x Usage
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Profit from Disposal of Asset indicates that the
depreciation expense for the asset has been
overestimated over its useful life
Loss from Disposal of Asset indicates that the
depreciation expense for the asset has been
underestimated over its useful life
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Section B – Profit/Loss on Disposal
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Section C – Recording
• Two methods of recording disposal of fixed
assets:
(a) A separate disposal of fixed asset
account
(b) No disposal of fixed asset account
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EXAMPLE 1:Mr. BUBU bought a delivery van on 1 January 2001 for
$20,000. BUBU decides to depreciate the delivery van
at the rate of 20% per annum. On 31 December 2002
due to the high cost of repairs and maintenance, BUBU
sold it for $15,000 to MUMU.
Section C – WITH DISPOSAL A/C
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Workings
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Section C – WITH DISPOSAL A/C
PARTICULARS
JOURNAL
ENTRIES: General Journal
DATE DEBIT CREDIT
2002 $ $
STEP 1
4,000
4,000
Depreciation of vehicle
Provision for depreciation of
vehicle
(Being depreciation of delivery van
for the second year)
Dec 31
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For this second year only
$20,000 x 20%
sec A sec B sec CWorkings
Depreciation
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Section C – WITH DISPOSAL A/C
PARTICULARS
General Journal
DATE DEBIT CREDIT
$ $
STEP 2a
2002
20,000
20,000
Disposal of vehicle
Vehicle
(Being transfer of delivery van sold
to Disposal Account)
Dec 31
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At Cost Price
sec A sec B sec CWorkings
Transfer AJOURNAL
ENTRIES:
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Section C – WITH DISPOSAL A/C
General Journal
DATE DEBIT CREDIT
$ $
STEP 2b
PARTICULARS
2002
8,000
8,000
Provision for depreciation of
vehicle
Disposal of vehicle
(Being transfer of accumulated
depreciation of delivery van to
Disposal Account)
Dec 31
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?
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Calculation?
Workings
Transfer BJOURNAL
ENTRIES:
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Section C – WITH DISPOSAL A/C
General Journal
DATE DEBIT CREDIT
$ $
STEP 3
PARTICULARS
2002
Bank
Disposal of vehicle
(Being cash received from disposal
of delivery van)
Dec 31 15,000
15,000
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Workings
What you receive?JOURNAL
ENTRIES:
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Section C – WITH DISPOSAL A/C
General Journal
DATE DEBIT CREDIT
$ $
STEP 4
PARTICULARS
2002
3,000
3,000
Disposal of vehicle
Profit & Loss
(Being delivery van which has a net
book value of $12,000 and selling
price at $15,000)
Dec 31
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Workings
Profit/Loss?JOURNAL
ENTRIES:
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Section C – WITH DISPOSAL A/C
General Journal
DATE DEBIT CREDIT
$ $
STEP 5a
PARTICULARS
2002
4,000
4,000
Profit & Loss Account
Depreciation of vehicle
(Being closing of depreciation to
Profit and Loss Account)
Dec 31
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Workings
Closing AJOURNAL
ENTRIES:
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Section C – WITH DISPOSAL A/CLEDGER
ENTRIES:
Vehicle Account
$ $
sec A sec B sec Cquit
Dec 31 20,000Disposal of
vehicle
2002
At Cost Price
2001
Bank 20,000Jan 1
2001
2002
Balance b/d 20,000Jan 1
Dec 31 20,000Balance c/d
Any purchase or sales of fixed assets are recorded
at the ORIGINAL COST of the asset
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1IN (BUY) OUT (SELL)
Show how you would record
in the firm’s book for 2 years
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Section C – WITH DISPOSAL A/C
Depreciation on Vehicle Account
2001 $ $2001
Provision for
depreciation
4,000Dec 31
sec A sec B sec Cquit
4,000Profit & Loss
A/c
Dec 31
2002
Provision for
depreciation
4,000Dec 31
2002
4,000Profit & Loss
A/c
Dec 31
$20,000
x 20%
LEDGER
ENTRIES:
3 4 5 6 721
2
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Section C – WITH DISPOSAL A/C
Provision for Depreciation of Vehicle Account
2001 2001$ $
8,000
8,000 8,000
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Dec 31 Depreciation 4,000Dec 31 Balance c/d 4,000
2002
4,000Balance b/dDec 31
2002
Disposal of
vehicle
Dec 31
4,000Dec 31 Depreciation
$20,000
x 20%
LEDGER
ENTRIES:
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3
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What is the amount of the provision for
depreciation that is required to be transferred to
the vehicle disposal account?
= FULL AMOUNT of the accumulated depreciation
on the DISPOSED ASSET up to the date of sale.
= Cost Price x Rate of depreciation x Usage
= $20,000 x 20% x 2
= $ 8,000
Section C – WITH DISPOSAL A/C
sec A sec B sec C
LEDGER
ENTRIES:
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Section C – WITH DISPOSAL A/C
Disposal of Vehicle Account
2002 2002$ $
Vehicle 20,000Dec 31
23,00023,000
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8,000Provision for
depreciation
Dec 31
Bank 15,000Dec 31
Profit & Loss 3,000Dec 31
LEDGER
ENTRIES:
3 4 5 6 721
4
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Section C – WITH DISPOSAL A/C
Bank Account
$
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LEDGER
ENTRIES:
3 4 5 6 721
5
Vehicle 20,000Jan 1
2001
Bank Account
2002 $
Disposal of
vehicle
15,000Dec 31
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Profit and Loss for the year ended 31 Dec 2001
2001 $
Depreciation
of vehicle
4,000Dec 31
Section C – WITH DISPOSAL A/C
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LEDGER
ENTRIES:
3 4 5 6 721
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Profit and Loss for the year ended 31 Dec 2002
2002 2002$ $
Depreciation
of vehicle
4,000Dec 31 3,000Disposal of
Vehicle
Dec 31
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Lessons Learnt
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3 Reasons for Disposal of Fixed Assets:
•Obsolescence
•High costs of repairs and maintenance
•Frequent breakdown
Gain/Loss on Disposal when:
•Selling Price >/< Net Book Value
Two methods of recording Disposal of Fixed Assets:
•With a separate disposal of fixed assets account
•Without a disposal of fixed assets account
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DISPOSAL OF FIXED ASSETS
DEBIT CREDITSteps
Lessons Learnt
Bank (cash received)3
Disposal of fixed asset
Fixed asset (trade in) Disposal of fixed asset
Disposal of fixed asset Fixed Asset
Provision for depreciation Disposal of fixed asset2
1 Provision for depreciationDepreciation
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Depreciation
Transfer
Receive?
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Lessons Learnt
DISPOSAL OF FIXED ASSETS
DEBIT CREDITSteps
4Disposal of fixed asset(If Loss) Profit & Loss
Disposal of fixed asset (If Profit) Profit & Loss
5Profit & Loss A/C Depreciation of FA
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Profit/Loss?
Closing
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Lessons Learnt
5 STEPS to RECORD DISPOSAL OF
FIXED ASSETS
(1) Depreciation
(2) Transfer
(3) Received?
(4) Profit/Loss?
(5) Closing
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micro
teachings
Prepared by
Alex Socratous
For My High School Students
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