Disposal of non-current assets: practice questions

How to approach these questions

Disposal questions check whether you can remove an asset cleanly from the books and calculate the profit or loss on selling it. Read the requirement to see what to produce. It may be the disposal account, the ledger entries in several accounts, or only the profit or loss figure for the income statement.

Before you write, find four pieces of information: the original cost, the accumulated depreciation up to the date of sale, the proceeds received and the date of disposal. Note the depreciation policy for the year of sale. Whether depreciation is charged in that year changes the accumulated figure you carry into the disposal account.

Open a disposal account and route everything through it. Debit it with the original cost, which transfers the asset out of the asset account. Credit it with the accumulated depreciation on that asset, which transfers it out of the provision for depreciation account.

Then credit it with the sale proceeds. The balancing figure is the profit or loss. If the credits exceed the debits, the balance is a profit on disposal.

If the debits are larger, it is a loss. For example, a van cost RM30,000, had accumulated depreciation of RM22,000 and was sold for RM6,000.

The carrying amount was RM8,000, so the loss is 8,000 − 6,000 = RM2,000. That balancing figure goes to the income statement.

Work through the three accounts in a set order so no half-entry is left. First, credit the asset account with the cost to clear the asset out. Second, debit the provision for depreciation account with the accumulated depreciation on that asset.

Third, record the proceeds. Debit cash or bank and credit disposal. If the old asset is traded in against a new one, debit the new asset account with the part-exchange allowance and credit disposal.

Show both sides of each transfer, because that earns method marks even if your final figure slips. Add a clear narrative to every entry.

If disposal is combined with a full non-current asset schedule, do the disposal calculation first. Then feed the results into the schedule. Remove the cost of the disposed asset from the cost column and its depreciation from the depreciation column.

The year-end carrying amount then reflects only the assets still held. Apply the depreciation policy exactly as the question states. Many policies charge a full year in the year of purchase and none in the year of disposal.

Others charge monthly. A wrong depreciation figure distorts both the disposal account and the closing carrying amount.

Cross-check your answer. Profit or loss on disposal always equals proceeds minus carrying amount at the date of sale. Carrying amount of RM8,000 against proceeds of RM6,000 confirms the RM2,000 loss.

If the two methods disagree, an entry is on the wrong side or the accumulated depreciation is wrong. The asset account and provision account should then show only the items you still hold.

Marks are mostly lost on a few points. Do not forget to transfer the accumulated depreciation as well as the cost. Leaving depreciation behind inflates the loss badly.

Do not net cost against depreciation before you enter them, because the disposal account needs gross figures on each side. With a trade-in, the part-exchange allowance counts as proceeds in the disposal account. It is also part of the cost of the new asset, so it appears in two places.

A profit on disposal is other income in the income statement and a loss is an expense.

If disposal accounts and trade-ins slow you down, one of our teachers can work through past-paper disposals with you until each entry is routine. Book a trial class