Disposal of Fixed Assets III Introduction Objectives: –State the 3 reasons for disposal...

Disposal of Fixed Assets III

IntroductionIntroduction

• Objectives:– State the 3 reasons for disposal– Recognise and calculate the gain/loss on

disposal of fixed assets– Record disposal of fixed asset– Prepare fixed asset a/c, provision for disposal

a/c and disposal of fixed asset a/c

• Target group: Secondary 3 express

quit

ContentsContents

Section A: Group Formation

Section C: Recording of Disposal of Fixed Assets involving 3

assets with a change of biz policy

Section B: Recording of Disposal of Fixed Assets involving 3 assets

quit

Section A – Group FormationSection A – Group Formation

sec A sec B sec C

Team 1

Team 2

Team 3

Team 4 Team 6

Team 5

1

1

23

45

523

4

Represent member x with card x

quit

EXAMPLE 3: (Worksheet D)Mr. BUBU started a fruit business on 1 July 2000. To improve

his business, he bought two machines on 1 Jan 2001 for

$10,000 each, paying by cheque. He charged depreciation on

the machines at 10% per annum for each year by the reducing

or diminishing balance method. Depreciation was to be

recorded in a separate Provision for Depreciation Account. On

30 June 2002, after allowing for the year’s depreciation, he

sold one of the machines for $8,800 which he put into the

bank. On 1 October 2002, he bought another new machine on

credit from MUMU for $20,000.

quit sec A sec B sec C

Section BSection B

EXAMPLE 3: (Worksheet D)

BUBU’s financial year ends on 31 December.

(i) Prepare the Machinery Account for each of the two years 2001 and 2002.

(ii) Prepare the Provision for Machinery Depreciation Account for the two years

(iii)Prepare the Machinery Disposal Account for 2002.

quit

Section BSection B

sec A sec B sec C

LEDGER ENTRIES:

Machinery Account

$ $

quit

At Cost Price

2001

20,000BankJan 1

2001

2002

Balance b/d 20,000Jan 1

Dec 31 20,000Balance c/d

Section BSection B

(2x$10,000)

IN (BUY) OUT (SELL)

10,000Dec 31 Disposal of Machinery

2002

Oct 1 MUMU 20,000

40,000 40,000

30,000Dec 31 Balance c/d

30,000Jan 1 Balance b/d

2003

sec A sec B sec C

Provision for Depreciation of Machinery Account

2001 2001$ $

1,450

3,850 3,850

quit

Dec 31 Depreciation 2,000Dec 31 Balance c/d 2,000

2002

2,000Balance b/dDec 31

2002

Disposal of Machinery

Dec 311,850Dec 31 Depreciation

Section BSection BLEDGER ENTRIES:

($20,000x10%)

Dec 31 Balance c/d 2,400

2002


sec A sec B sec C

Disposal of Machinery Account

2002 2002$ $

10,000MachineryJun 30

10,25010,250

quit

1,450Provision for depreciation

Dec 31

8,800BankDec 31 250Profit on

disposalDec 31

Section BSection BLEDGER ENTRIES:

Balancing figure

sec A sec B sec C

quit

Selling Price = Amount received for the disposal

= $8,800

Gain on disposal = SP – NBV

= $ 8,800 - $ 8,550

= $ 250

Net Book Value = Price at - Total accumulated

cost depreciation

= $10,000 - $1,450

= $ 8,550

Provision for depreciation

Section BSection B

sec A sec B sec C

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.

= Year 1 Depreciation + Year 2 Depreciation

= (Cost Price x Rate) + [(Cost Price – Year 1) x Rate x Usage] Depreciation

= ($10,000 x 10%) + [($10,000-$1,000) x 10% x ½]

= $ 1,000 + $ 450

Section BSection B

= $ 1,450

sec A sec B sec Cquit

Section BSection BWhat is the depreciation for the 3 machines in year 2002?• Machine A (Bought on 1 Jan 2001)

= ($10,000-$1,000) x 10%

= $ 900• Machine B (Dispose off on 30 June 2002)

= ($10,000-$1,000) x 10% x ½

= $ 450• Machine C (Bought on 1 Oct 2002)

= $20,000 x 10% x 3/12

= $ 500

Therefore total depreciation = $900 + $450 +$500

= $1850sec A sec B sec Cquit

Section CSection C

EXAMPLE 4:Mr. BUBU bought two machines on 1 Jan 2001 for $10,000

each, paying by cheque. He charged depreciation on the

machines at 10% per annum for each year by the reducing or

diminishing balance method. His policy is to charge a full His policy is to charge a full

year’s depreciation in the year of purchases but not year’s depreciation in the year of purchases but not

charge any in the year of sales.charge any in the year of sales. On 30 June 2002, he sold

one of the machines for $8,800 which he put into the bank. On

1 October 2002, he bought another new machine on credit

from MUMU for $20,000.


Section CSection C

EXAMPLE 4:BUBU’s financial year ends on 31 December.

(i) Prepare the Machinery Account for each of the two years 2001 and 2002

(ii) Prepare the Provision for Machinery Depreciation Account for the two years

(iii)Prepare the Machinery Disposal Account for 2002.


LEDGER ENTRIES:

Machinery Account

$ $

quit

At Cost Price

2001

20,000BankJan 1

2001

2002

Balance b/d 20,000Jan 1

Dec 31 20,000Balance c/d(2x$10,000)

IN (BUY) OUT (SELL)

10,000Dec 31 Disposal of Machinery

2002

Oct 1 MUMU 20,000

40,000 40,000

30,000Dec 31 Balance c/d

30,000Jan 1 Balance b/d

2003

Section CSection C

sec A sec B sec C

Provision for Depreciation of Machinery Account

2001 2001$ $

1,000

4,900 4,900

quit

Dec 31 Depreciation 2,000Dec 31 Balance c/d 2,000

2002


2002

Disposal of Machinery

Dec 312,900Dec 31 Depreciation

($20,000x10%)

Dec 31 Balance c/d 3,900

2002


Section CSection CLEDGER ENTRIES:

sec A sec B sec C

Disposal of Machinery Account

2002 2002$ $

10,000MachineryJun 30

10,00010,000

quit

1,000Provision for depreciation

Dec 31

8,800BankDec 31

200Loss on disposal

Dec 31

Section CSection CLEDGER ENTRIES:

Balancing figure

sec A sec B sec C

quit

Selling Price = Amount received for the disposal

= $8,800

Loss on disposal = NBV – SP

= $ 9,000 - $ 8,800

= $ 200

Net Book Value = Price at - Total accumulated

cost depreciation

= $10,000 - $1,000

= $ 9,000

Provision for depreciation

Section CSection C

sec A sec B sec C

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.

= Year 1 Depreciation + Year 2 Depreciation

= (Cost Price x Rate) + (No depreciation charged in the year)

of sales

= ($10,000 x 10%) + 0

= $ 1,000

Section CSection C


What is the depreciation for the 3 machines in year 2002?• Machine A (Bought on 1 Jan 2001)

= ($10,000-$1,000) x 10% = $ 900• Machine B (Dispose off (sold/out) on 30 June 2002)

= Do not charge any depreciation in the year of sales

= zero

• Machine C (Bought on 1 Oct 2002)

= Charge a full year’s depreciation in the year of purchases

= $20,000 x 10% = $ 2000

Total depreciation = $900 + $2,000

= $2,900

Section CSection C


Lessons LearntLessons Learnt

quit

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

sec A sec B sec C

DISPOSAL OF FIXED ASSETSDEBIT CREDITSteps


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


Depreciation

Transfer

Receive?


DISPOSAL OF FIXED ASSETSDEBIT CREDITSteps

4Disposal of fixed assetLoss on disposal

Disposal of fixed asset Profit on disposal

5

Profit & Loss A/C

Profit on disposal Profit & Loss A/C

Depreciation of FA

Profit & Loss A/C Loss on disposal


Profit/Loss?

Closing

Lessons LearntLessons Learnt5 STEPS to RECORD DISPOSAL OF FIXED ASSETS

(1) Depreciation(1) Depreciation

(2) Transfer(2) Transfer

(3) Received?(3) Received?

(4) Profit/Loss?(4) Profit/Loss?

(5) Closing(5) Closing



RECORD DISPOSAL OF FIXED ASSETS INVOLVING:

• Three fixed assets:

(1) 2 fixed assets bought

(2) 1 of the 2 fixed assets will be sold later

(3) Buy a new fixed asset


• One fixed asset bought and sold

• Two fixed assets bought and sold one later

• Fixed assets with change in company’s

depreciation policy

microteachings

Prepared by

Tan Seet Ling, Patrina31 October 2001

national institute of educationcopyright 2001

quit

Disposal of Fixed Assets III Introduction Objectives: –State the 3 reasons for disposal...

Documents

Transcript of Disposal of Fixed Assets III Introduction Objectives: –State the 3 reasons for disposal...