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:-
1. To record the purchase of motor vehicle on 1 February 2006
|
Balance Sheet |
Income Statement |
|||
|
DR |
CR |
DR |
CR |
|
| Motor vehicle – Cost |
24,000 |
|
|
|
| Cash at bank |
|
24,000 |
|
|
2. To record depreciation of motor vehicle from the date of acquisition (1 February 2006) to the end of the financial year (31December 2006)
|
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: –
1. 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)
|
Balance Sheet |
Income Statement |
|||
|
DR |
CR |
DR |
CR |
|
| Depreciation – Motor vehicle |
|
|
400 |
|
| Motor vehicle – Accumulated depreciation |
|
400 |
|
|
2. To record the disposal of motor vehicle and recognise the loss on disposal
|
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 | Depreciation of motor vehicle | 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 |