Various Types of Transactions – Collection from Other Source of Revenue and Income, Proceeds from Disposal of Assets (Part 4d)

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

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