DISPOSAL OF FIXED ASSETS

1.        Gain or loss on disposal of a non-current asset
   Property, plant and equipment are eventually disposed of:
   •  by sale, or
   •  if they have no sale value, through disposal as scrap.
   Disposal can occur at any time and need not be at the end of the asset’s expected useful life.
   The effect of a disposal on the statement of financial position (or accounting equation) is that:
   •  the asset (at cost or valuation) is no longer in the statement of financial position, and
   •   the accumulated depreciation on the asset is also no longer in the statement of financial position.
   The carrying amount of the asset is therefore removed from the accounting equation.
   There is a gain or loss on disposal of the asset, as follows:
    

   

   Gain or loss on disposal

   Example:
   
   A non-current asset originally cost Rs.75,000. Accumulated depreciation is Rs.51,000.
   The asset is now sold for Rs.18,000. Disposal costs are Rs.500.
   What is the gain or loss on disposal?
    

   

   Gain or loss on disposal

   
   
   
   
   2.      Accounting for the disposal of property, plant and equipment
   In the general ledger the gain or loss on disposal of a non-current asset is recorded in a disposal of asset account. The double entry transactions required are as follows – for an asset recorded at cost rather than at a re-valued amount.
   Step 1: Transfer the cost of the non-current asset from the asset account to the disposal account:
   Step 2: Transfer the accumulated depreciation on the asset from the accumulated depreciation account to the disposal account:
   
   
   
   The carrying amount of the asset is now in the disposal account.
   
   
   Step 3: Record the disposal costs in the disposal account.
   
   
   
   
   
   
   
   Step 4: Record the sale proceeds in the disposal account:
   
   
   
   
   
   Step 5: The balance on the disposal account is the gain or loss on disposal. This is transferred to the statement of comprehensive income.
   
   
   Example:
   A non-current asset cost Rs.82,000 when purchased. It was sold for Rs.53,000 when the accumulated depreciation was Rs.42,000. Disposal costs were Rs.2,000.
   Required
   Show the book-keeping entries to record the disposal.
   
   
   
   
   
   Non-current asset accounts in the general ledger are usually maintained for a category of assets rather than for individual assets. This means that when a noncurrent asset is disposed of, there will be a closing balance to carry forward on the asset account and the accumulated depreciation account.
   Example:
   In the previous example, suppose that the balance on the non-current asset account before the disposal was Rs.500,000 and the balance of the accumulated depreciation account was Rs.180,000.
   The accounting entries would be as follows:
   
   
   
   Read Also: METHODS OF CALCULATING DEPRECIATION