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46
Chapter 7

Disposal of Fixed Assets

When a Fixed asset is sold, it is necessary to bring together: 1) the original cost
of the asset; 2) the depreciation accumulated throughout the years and 3) the
sale proceeds. Figures related to the sale of a fixed asset are transferred from
their appropriate accounts to a Disposal Account.
A Disposal Account will enable us to calculate the Profit or Loss registered
on the sale of a particular Fixed Asset.

Accounting Entries:

1 Debit Disposal Account
With the cost
of

Credit Fixed Asset
Account

the fixed
asset sold.



2 Debit Depreciation Provision Account
With the depreciation
accumulated
Credit Disposal Account
to-
date.




3 Debit Cash or Bank Account
With the sale
proceeds

Credit Disposal Account



4 Debit Profit and Loss Account
If a Loss is
made

Credit Disposal Account

or

Debit Disposal Account
If a Profit
is made

Credit Profit and Loss Account



Example: A machine was purchased for Lm2,000 on 1 January 2001 and is
depreciated by 20 per cent each year, using the straight line method. On 31
December 2003, the machine is sold for Lm600. Show for the 3 years (2001
2003):
a) The Machinery Account;
b) The Provision for Depreciation Account;
c) The Disposal Account;
d) The Profit and Loss Account (Extracts).



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Dr Machinery
Account
Cr
2001 Lm 2003 Lm
Jan-01 Cash/Bank 2,000 Dec-31 (1) Disposal 2,000


Dr Depreciation Provision Account Cr
2001 Lm 2001 Lm
Dec-31 Bal c/d 400 Dec-31 To Profit and Loss 400
2002 2002
Dec-31 Bal c/d 800 Jan-01 Balance b/d 400
Dec-31 To Profit and Loss 400
800 800
2003 2003
Dec-31 (2) Disposal 1,200 Jan-01 Balance b/d 800
Dec-31 To Profit and Loss 400
1,200 1,200

Dr Diposal Account Cr
2003 Lm 2003 Lm
Dec-31 Machinery 2,000 Dec-31 Depreciation Provision 1,200
Dec-31 Cash/Bank 600
Dec-31 To Profit and Loss 200
2,000 2,000

Profit and Loss account (Extract) for the years ended 31 December
2001 - 2003

Expenses:


2001 Depreciation of Machinery

400
2002 Depreciation of Machinery

400
2003 Depreciation of Machinery

400

Loss on Disposal of Machinery

200


Part-Exchange of a Fixed Assets

Instead of selling an old fixed asset, it is quite common to part-exchange it for
a new asset. Once the part-exchange allowance has been agreed, the
accounting entries for disposal are the same as the usual disposal of a fixed
asset except that, instead of sale proceeds (step no.3) there will be entries for
the part-exchange amount. The double entry would be:

Debit: Fixed Asset Account.
Credit: Disposal Account.


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The remainder of the purchase cost of the new fixed asset (if paid by cheque)
is:
Debit: Fixed Asset Account.
Credit: Bank Account.



Example:

A Machine was purchased for Lm2,000 on 1 January 2001 and depreciated by
20% p.a. on cost. On 31 December 2003 the machine is part exchanged at an
agreed value of Lm600 for a new machine costing Lm2,500. The balance is
paid by cheque. Open the necessary accounts.

Dr Machine Account Cr
2001 Lm 2003 Lm
Jan-01 Cash/Bank 2,000 Dec-31 Disposal 2,000
2003 2003
Dec-31 Disposal 600 Dec-31 Balance c/d 2,500
Dec-31 Bank 1,900
2,500 2,500
2004
Jan-01 Balance b/d 2,500


Dr Depreciation Provision Account Cr
2001 Lm 2001 Lm
Dec-31 Balance c/d 400 Dec-31 To Profit and Loss 400
2002 2002
Jan-01 Balance c/d 800 Jan-01 Balance b/d 400
Dec-31 To Profit and Loss 400
800 800
2003 2003
Jan-01 Disposal 1,200 Jan-01 Balance b/d 800
Dec-31 To Profit and Loss 400
1,200 1,200

Dr Disposal Account Cr
2003 Lm 2003 Lm
Dec-31 Machinery 2,000 Dec-31 Machinery 600
Dec-31 Depreciation Provision 1,200
Dec-31 To Profit & Loss 200
2,000 2,000


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Note that in the disposal account instead of Bank/Cash Lm600 we included
the part exchange value of Lm600.



Exercises

1. A machine is bought on 1 January 2000 for Lm1,000 and another one
on 1 October 2001 for Lm1,200. The first machine is sold on 30 June
2002 for Lm720. The firms financial year ends on 31 December. The
machinery is to be depreciated at 10%, using the straight-line method
and based on assets in existence at the end of each year ignoring items
sold during the year.

You are required to show for 2000, 2001 and 2002:
(i) Machinery account;
(ii) Depreciation Provision Account;
(iii) Machinery Disposal Account;
(iv) Profit and Loss and Balance Sheet Extracts.

2. A business with its financial year-end being 31 December buys two
motor vans, no.1 for Lm800 and no.2 for Lm500, both on 1 January
1995. The firm also buys another motor van, no.3 on 1 July 1997 for
Lm900 and another no.4, on 1 October 1997 for Lm720.
The first two motor vans are sold, no.1 for Lm229 on 30 September
1998, and the other, no.2, was sold for Lm30.
Depreciation is on the straight-line basis, 20% p.a., motor vans being
depreciated on a monthly basis.

You are required to show for four years (1995 1998):
(i) The Motor Vans Account;
(ii) The Depreciation Provision Account;
(iii) The Disposal Account for 1997 and 1998.
(iv) The Profit and Loss Account extract.

3. The business started operating on 1 January 1993. It is their policy to
depreciate Office Equipment by the Equal Installment (Straight Line)
method, at 10 % p.a. The cost price of the Equipment in use at 1
January 1996 was Lm3,420 and the total depreciation written off this
equipment by that date was Lm822.
New Equipment was purchased on 1 July 1996 at a cost of Lm360 and
on 1 January 1997 at a cost of Lm270.
Equipment bought on 1 January 1995 for Lm510 was sold on 1 January
1997 for Lm324.
You are asked to show for 1996 and 1997:
a. the Equipment Account ;
b. the Depreciation Provision Account for Equipment ;

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c. the Equipment Disposal Account.
d. the Profit and Loss Extracts.

3. On 1 January 1996 a company purchased 4 machines for Lm2000 each.
The annual charge for depreciation is calculated at the rate of 10% p.a.
on cost. On 1 January 1997, one of the machines was sold for Lm1722
and on the same day 2 additional machines were purchased at a cost of
Lm2400 each. On 1 January, 1998, another of the original machines
was sold for Lm1625 but was not replaced.
You are required to show:
i. The machinery A/C and the Provision for Depreciation Account
for the years 1996, 1997, 1998.
ii. The Machinery Disposal A/C for 1997, 1998.
iii. How the machinery would appear in the Balance Sheet as at 31
December, 1998.

5. The following information relates to the Motor Vehicles owned by
General Motors Ltd which commenced business on 1 May 1989.

1 May 1989 : Bought Motor Vehicle Lm10,000 on credit form
Duminku Garage.
1 May 1989 : Bought Motor Vehicle Lm12,000 by cheque
30 June 1989 : Paid Duminku Garage Lm10,000 by cheque
1 May 1991 : Bought Motor Vehicle for Lm13,000 on credit from
Duminku Garage.
31 May 1991 : Settled Duminku Garages account by cheque
20 July 1991 : Sold for Lm5000 Cash the Motor Vehicle which was
bought on 1 May 1989 for Lm10,000.
The financial year of General Motors Ltd ends on 30 April each year. It
is the company policy to depreciate its Motor Vehicles by 20% p.a. on
cost but no depreciation is charged on a Motor Vehicle in the year in
which it is sold.
a. i. Why do firms depreciate fixed Assets ?
ii. Explain one method of calculating depreciation other than
that used by General Motors Ltd.

b. For the years ending 30 April 1990, 1991 and 1992 write up the
following accounts as they would appear in the books of General
Motors Ltd.
i. the Motor Vehicle Account
ii. the Motor Vehicle Disposal Account
iii. the Provision for Depreciation Account
iv. Duminku Garage Account




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