Non-current assets, depreciation and disposal in QCE Accounting Unit 3
“Apply double-entry and GST principles to record the acquisition, depreciation (straight-line and reducing-balance) and disposal of non-current assets, and report carrying amount in the balance sheet”
A non-current asset is recorded at cost, the GST-exclusive purchase price plus any costs to get it ready for use, with GST sent to GST Clearing. Depreciation allocates that cost (less residual value) over the asset's useful life under the matching concept. Straight-line gives an equal expense each year: (cost - residual) / life. Reducing-balance applies a fixed rate to the carrying amount, giving higher expense early. Depreciation is debited to Depreciation expense and credited to Accumulated Depreciation, a contra-asset. Carrying amount equals cost minus accumulated depreciation. On disposal, the asset and its accumulated depreciation are removed and compared with proceeds: sale proceeds above carrying amount give a profit on disposal, below give a loss.
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What this dot point is asking
QCAA wants you to manage the long-life resources of a sole-trader trading GST business. You must record the acquisition of a non-current asset at cost (with GST), allocate that cost as depreciation over its useful life using the straight-line and reducing-balance methods, maintain accumulated depreciation as a contra-asset, report carrying amount in the balance sheet, and account for disposal including the profit or loss on sale.
Acquisition
A non-current asset is recorded at cost: the GST-exclusive purchase price plus any costs needed to bring it into use (delivery, installation). GST is recovered through GST Clearing. Buying equipment for $22,000 including GST plus $1,100 installation including GST:
- Debit Equipment $21,000 (20,000 + 1,000 installation)
- Debit GST Clearing $2,100
- Credit Cash at Bank or Accounts Payable $23,100
Only GST-exclusive amounts capitalise into the asset; the GST is reclaimed.
Depreciation
Depreciation allocates the depreciable cost (cost minus residual value) over the asset's useful life, matching the expense to the revenue the asset helps earn. It is a non-cash expense and an estimate.
Straight-line method
Equal depreciation each period:
Depreciation per year = (cost - residual value) / useful life
For equipment costing $21,000 with a $1,000 residual and a 5-year life:
(21,000 - 1,000) / 5 = $4,000 per year
Reducing-balance method
A fixed percentage rate is applied to the carrying amount (cost minus accumulated depreciation), so the expense is larger in early years and smaller later. Residual value is not subtracted in the calculation; depreciation simply slows as the carrying amount falls. At a 30% rate on $21,000:
- Year 1: 30% x 21,000 = $6,300, carrying amount $14,700
- Year 2: 30% x 14,700 = $4,410, carrying amount $10,290
- Year 3: 30% x 10,290 = $3,087, carrying amount $7,203
Reducing-balance suits assets that lose value or productivity faster early in life (vehicles, technology). Straight-line suits assets used evenly over time (buildings, fixtures).
Recording depreciation
Whichever method is used, the entry is the same:
- Debit Depreciation $4,000
- Credit Accumulated Depreciation $4,000
Accumulated Depreciation is a contra-asset with a credit balance. It is not the same as the depreciation expense: the expense is the current period's allocation, while accumulated depreciation is the total to date.
Carrying amount
In the balance sheet, the asset is shown at carrying amount (also called book value):
Carrying amount = cost - accumulated depreciation
After two years of straight-line depreciation, the equipment shows cost $21,000 less accumulated depreciation $8,000, a carrying amount of $13,000. Carrying amount is an allocation figure, not a market value.
Disposal
When an asset is sold, the asset account and its accumulated depreciation are removed, and the proceeds are compared with the carrying amount. A disposal of asset account is used:
- Transfer the asset at cost: debit Disposal, credit Equipment.
- Transfer accumulated depreciation: debit Accumulated Depreciation, credit Disposal.
- Record proceeds (with GST on sale): debit Cash at Bank, credit Disposal and GST Clearing.
- The balance on the Disposal account is the profit (credit balance) or loss (debit balance) on disposal.
A profit on disposal arises when proceeds exceed carrying amount, meaning depreciation was charged too quickly; a loss means it was charged too slowly. Both are reported in the income statement and reflect the imprecision of estimating useful life and residual value.
The data
Northgate Joinery bought a delivery van on 1 July Year 1 for $44,000 including GST. The van has an estimated residual value of $4,000 and a 5-year life, depreciated straight-line. On 1 July Year 3 (after two full years) the van is sold for $27,500 including GST.
Step 1: Acquisition cost
GST-exclusive cost = 44,000 / 1.1 = $40,000 (GST $4,000 to GST Clearing).
Step 2: Annual depreciation (straight-line)
(40,000 - 4,000) / 5 = $7,200 per year
After two years, accumulated depreciation = 7,200 x 2 = $14,400.
Step 3: Carrying amount at disposal
40,000 - 14,400 = $25,600.
Step 4: Proceeds and profit/loss
GST-exclusive proceeds = 27,500 / 1.1 = $25,000 (GST $2,500 to GST Clearing).
Proceeds $25,000 less carrying amount $25,600 = loss on disposal of $600.
Step 5: Disposal account
| Disposal of van | Debit |
|---|---|---|
| Van (cost) | 40,000 | |
| Accumulated depreciation | | 14,400 |
| Proceeds (GST-exclusive) | | 25,000 |
| Loss on disposal (balancing) | | 600 |
| | 40,000 | 40,000 |
The $600 loss is reported as an expense in the income statement.
- Subtracting residual value under reducing-balance
- Reducing-balance applies the rate to the carrying amount; residual value is only used in the straight-line formula.
- Capitalising the GST into the asset
- Only the GST-exclusive cost capitalises; GST goes to GST Clearing.
- Confusing depreciation expense with accumulated depreciation
- The expense is one period's charge; accumulated depreciation is the running total.
- Comparing proceeds with cost instead of carrying amount
- Profit or loss on disposal is proceeds minus carrying amount, not proceeds minus original cost.
Exam-style questions
Questions in the style of QCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice9 marksRead Case study 1 (Stimulus 1) in the stimulus book. Prepare general journal entries to record all outstanding transactions as at 30 June 2024. Narrations are not required. [Garden Supplies bought a bobcat on 1 October 2023 for $33 000 including GST; a 5% deposit was paid and a loan immediately taken out for the balance. $4 400 including GST was paid at that time to install air-conditioning in the cabin. The bobcat has an estimated life of five years and a residual value of $11 000, depreciated straight-line.]Show worked answer →
Work the figures from the stimulus, then journalise. All amounts include 10% GST, so divide by 11 to isolate the GST.
Acquisition. Bobcat cost excluding GST = 33 000 / 1.1 = 3 000. The 5% deposit is 5% of 1 650 cash; the loan covers the balance of $31 350.
- DR Bobcat 30 000, DR GST Clearing 3 000, CR Cash at Bank 1 650, CR Loan 31 350.
Installation. Installation is part of getting the asset ready for use, so it is capitalised to the asset, not expensed. 4 000 excluding GST, GST = $400.
- DR Bobcat 4 000, DR GST Clearing 400, CR Cash at Bank 4 400.
Total depreciable cost = 30 000 + 4 000 = $34 000.
Depreciation to 30 June 2024. Straight-line annual charge = (cost - residual) / life = (34 000 - 11 000) / 5 = 3 450.
- DR Depreciation on bobcat 3 450, CR Accumulated depreciation on bobcat 3 450.
Markers award marks for correct GST splits, capitalising the installation, the deposit and loan split, and pro-rata depreciation for nine months.
Practice1 markA business purchased furniture for $16 500 (including GST) on 30 September 2020. The furniture was to be depreciated at 10% using the straight-line method over 10 years. The owner decided to sell the furniture on 30 June 2023 for $12 500 cash. Calculate the accumulated depreciation balance to be transferred to the disposal account. (A) $3 000 (B) $4 125 (C) $4 500 (D) $4 538Show worked answer →
The correct answer is (B) $4 125.
First strip the GST to find the depreciable cost: 16 500 / 1.1 = 1 500 per year.
Now count the time the asset was held: from 30 September 2020 to 30 June 2023 is 2 years and 9 months, that is 2.75 years.
Accumulated depreciation = 1 500 x 2.75 = $4 125. This is the balance transferred to the disposal account when the asset is sold. The $12 500 sale proceeds and any profit or loss on disposal are separate calculations and are not what this question asks for.