Fiche de révision : Disposal of Non-Current Assets

📋 Course Outline

1. Disposal Components and Carrying Value
2. Recording Cash Sale Proceeds
3. Loss on Disposal
4. Profit on Disposal
5. Assessing Depreciation Accuracy
6. Trade-In of a Non-Current Asset

📖 1. Disposal Components and Carrying Value

🔑 Key Concepts & Definitions

• Disposal of a non-current asset : Includes both a cash sale and a trade-in of the asset.
• Carrying value : The amount at which the non-current asset is recorded after accumulated depreciation and is the amount used to measure its disposal.

📝 Essential Points

★ Must-know

🔄 Process — Recording a disposal of a non-current asset involves transferring the asset’s Carrying value, recording the Proceeds on disposal, and transferring the resulting Profit or loss on disposal.

🧮 Formula — Profit or loss on disposal equals the Proceeds on disposal minus the Carrying value of the asset.

Further detail

• When an asset is disposed of, both the asset account and its Accumulated depreciation account must be removed from the ledger.

💡 Memory Hook

Value out, proceeds in, result calculated

📖 2. Recording Cash Sale Proceeds

📝 Essential Points

★ Must-know

🔄 Process — For a cash sale, Bank is debited for the full amount received, GST Clearing is credited for the GST, and Disposal of the asset is credited for the proceeds excluding GST.

🔄 Process — The Disposal of Equipment account records the asset’s Carrying value as a debit and the Accumulated depreciation and Proceeds on disposal as credits.

📌 Cash received from the sale of a non-current asset is reported in the Cash Flow Statement as an Investing activities cash inflow called Cash received from sale of equipment or Proceeds from sale of equipment.

Further detail

📌 GST from a cash sale is reported as a Cash inflow under Operating activities with other GST received.

• In the cash-sale example, Bank is debited $1,100, Disposal of Equipment is credited$1,000, and GST Clearing is credited $100.

📖 3. Loss on Disposal

🔑 Key Concepts & Definitions

• Loss on disposal : Of a non-current asset occurs when the Proceeds on disposal are less than the asset’s Carrying value.

📝 Essential Points

★ Must-know

🔄 Process — To close a Disposal of Equipment account with a $2,000 debit balance, Disposal of Equipment is credited$2,000 and Loss on Disposal of Equipment is debited $2,000.

• A debit balance in the Disposal of Non-current asset account indicates a loss on disposal because the Carrying value exceeds the Proceeds on disposal.

Further detail

📌 Loss on Disposal of Equipment is closed to the Profit and Loss Summary account and reported in the Income Statement as an Other expense.

• When equipment has a Carrying value of $3,000 and proceeds of$1,000, the loss on disposal is $2,000.

💡 Memory Hook

Debit balance means loss

📖 4. Profit on Disposal

🔑 Key Concepts & Definitions

• Profit on disposal : Of a non-current asset occurs when the Proceeds on disposal are greater than the asset’s Carrying value.

📝 Essential Points

★ Must-know

🔄 Process — To close a Disposal of Furniture account with a $300 credit balance, Disposal of Furniture is debited$300 and Profit on Disposal of Furniture is credited $300.

• A credit balance in the Disposal of Non-current asset account indicates a profit on disposal because the Proceeds on disposal exceed the Carrying value.

Further detail

📌 Profit on Disposal of Furniture is closed to the Profit and Loss Summary account and reported in the Income Statement as Other revenue.

• When furniture has a Carrying value of $2,000 and proceeds of$2,300, the profit on disposal is $300.

💡 Memory Hook

Credit balance means profit

📖 5. Assessing Depreciation Accuracy

🔑 Key Concepts & Definitions

• Under-depreciation : Occurs when insufficient depreciation expense has been allocated over the life of a non-current asset, resulting in an overstatement of its Carrying value.
• Over-depreciation : Occurs when excess depreciation expense has been allocated over the life of a non-current asset, resulting in an understatement of its Carrying value.

📝 Essential Points

★ Must-know

🔄 Process — Under-depreciation can lead to a loss because an overstated Carrying value exceeds the asset’s resale value and Proceeds on disposal.

🔄 Process — Over-depreciation can lead to a profit because an understated Carrying value is below the asset’s resale value and Proceeds on disposal.

Further detail

• Under-depreciation may result from overstated Residual value or Useful life, for example when the asset is damaged, superseded by a technologically superior model, or not in demand.

• Over-depreciation may result from understated Residual value or Useful life, for example when the asset remains in good condition or is in high demand.

💡 Memory Hook

Under-depreciation causes loss; over-depreciation causes profit

📖 6. Trade-In of a Non-Current Asset

🔑 Key Concepts & Definitions

• Trade-in : Proceeds on the disposal of a non-current asset in the form of a reduction in the amount payable for a new non-current asset.

📝 Essential Points

★ Must-know

🔄 Process — The disposal of a traded-in asset is recorded at its Carrying value by crediting the old asset account, debiting its Accumulated depreciation account, and recording corresponding entries in the Disposal account.

📌 For a trade-in, the proceeds are credited to the Disposal account and the new non-current asset account is debited instead of Bank, with no GST recorded on the trade-in proceeds.

📌 A trade-in is not reported in the Cash Flow Statement because it does not create a cash flow.

Further detail

• In the delivery-van example, a van with a $1,200 Carrying value is traded in for$700, producing a $500 loss on disposal.

• After the trade-in example, the new van is recorded at its Historical cost of $30,000 in the Van account.

💡 Memory Hook

Trade-in replaces cash proceeds

📊 Synthesis Tables

Disposal Result and Accounting Treatment

⚠️ Common Pitfalls & Confusions

1. Disposal is not limited to receiving cash.
2. The proceeds account is credited only with the sale amount excluding GST.
3. A loss results from proceeds below carrying value, not from proceeds above it.
4. A profit results from proceeds above carrying value, not from proceeds below it.
5. Under-depreciation makes carrying value too high.
6. A trade-in provides a purchase reduction rather than cash proceeds.
7. Carrying value is not the asset’s Historical cost or market value.