Disposal of non-current assets (VCE Accounting Unit 4)
“Recording the disposal of non-current assets, including by sale and trade-in, calculating the profit or loss on disposal and explaining its cause”
When a non-current asset is sold or traded in, its cost and accumulated depreciation are removed and the proceeds compared with the carrying amount. Proceeds above carrying amount give a profit on disposal; proceeds below give a loss. The profit or loss exists because the depreciation estimates of useful life and residual value did not exactly match reality.
Jump to a section
What this dot point is asking
VCAA wants you to record the disposal of a non-current asset by sale and by trade-in, calculate the profit or loss on disposal, and explain why it arises. This extends the depreciation work from Unit 3.
The disposal process
When an asset is disposed of, several accounts must be cleared and a disposal account is used to bring them together.
The carrying amount is the cost of a non-current asset less its accumulated depreciation to the date of disposal. It represents the unconsumed economic benefit still recorded for the asset.
The steps are:
- Record depreciation up to the date of disposal so the carrying amount is current.
- Transfer the asset's cost to the Disposal account (Debit Disposal, Credit Asset).
- Transfer the accumulated depreciation to the Disposal account (Debit Accumulated Depreciation, Credit Disposal).
- Record the proceeds. For a cash sale, Debit Bank and Credit Disposal. For a trade-in, Debit the new asset and Credit Disposal with the trade-in value.
- Balance the Disposal account. A credit balance is a profit on disposal; a debit balance is a loss on disposal.
Why a profit or loss arises
Depreciation is based on estimates of useful life and residual value made when the asset was bought. If the asset sells for more than its carrying amount, the business under-depreciated (the asset lasted better than expected), giving a profit on disposal. If it sells for less, the business over-depreciated, giving a loss on disposal. The profit or loss is therefore a correction of past depreciation estimates, not a trading result.
A profit on disposal is reported as other revenue, separate from sales, because selling a non-current asset is not the core trading activity. It signals that earlier depreciation estimates were too high.
Scenario
A vehicle cost 30,000 dollars and has accumulated depreciation of 22,000 dollars at the date of trade-in. It is traded in for 5,000 dollars against a new vehicle costing 35,000 dollars, with the balance paid by loan.
Carrying amount
Carrying amount = cost 30,000 minus accumulated depreciation 22,000 = 8,000 dollars.
Disposal account
- Debit Disposal 30,000, Credit Vehicle 30,000 (remove cost)
- Debit Accumulated Depreciation 22,000, Credit Disposal 22,000 (remove depreciation)
- Debit New Vehicle 5,000, Credit Disposal 5,000 (trade-in value)
Disposal account totals: debit side 30,000; credit side 22,000 plus 5,000 = 27,000.
Profit or loss
Debit side exceeds credit side by 30,000 minus 27,000 = 3,000 dollars, a debit balance, which is a loss on disposal of 3,000 dollars. This equals proceeds of 5,000 minus carrying amount of 8,000.
Check
The 3,000 dollar loss shows the vehicle was over-depreciated: its carrying amount of 8,000 dollars overstated its actual worth of 5,000 dollars.
Effect on the reports
The loss on disposal is an expense in the Income Statement, lowering net profit. A profit on disposal is other revenue, raising net profit. In the Balance Sheet, the old asset and its accumulated depreciation are removed and any new asset is added. In the Cash Flow Statement, cash proceeds from a sale are an investing inflow; a trade-in involves no separate cash flow for the traded portion.
Ethical considerations
Manipulating the timing of disposals or selectively choosing depreciation estimates to smooth profit raises ethical issues. Faithful representation requires that disposals be recorded in the correct period and that estimates be made in good faith, so that reports are not distorted to mislead the owner, lenders or the tax authority.
Students often transfer the asset and accumulated depreciation without first recording depreciation for the part-year up to the disposal date. Skipping this overstates the carrying amount and produces the wrong profit or loss. Always update depreciation to the date of disposal before clearing the accounts.
Exam-style questions
Questions in the style of VCAA 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.
2022 VCAA-style5 marksE-Sortz reports monthly. Its Balance Sheet at 31 May 2022 showed Van $45 000 less Accumulated Depreciation of Van $37 000 (carrying value $8 000). Depreciation is 30% per annum using the reducing balance method. On 1 July 2022, E-Sortz sold the van for $5 000 (plus GST) (Rec. 365). Complete the Disposal of Van account.Show worked answer →
Update depreciation to the sale date, transfer cost and accumulated depreciation into the Disposal account, then record proceeds and the profit or loss.
June depreciation (one month on carrying value 200. Accumulated Depreciation becomes 37 000 + 200 = 7 800.
Disposal of Van account:
Debit side: Van $45 000.
Credit side: Accumulated Depreciation of Van $37 200; Bank $5 000 (proceeds, GST excluded); Loss on Disposal of Van $2 800.
Totals: 45 000.
Loss = carrying value 7 800 - proceeds 5 000 = $2 800. Marks: van cost, updated accumulated depreciation $37 200, $5 000 proceeds, and the $2 800 loss.
2020 VCAA-style3 marksThe Disposal of Computers account of Keyword Computers shows Computers $20 000 (debit), and on the credit side Accumulated Depreciation of Computers $15 000, Bank $3 000 and Loss on Disposal of Computers $2 000. Explain why the loss on disposal of the computers has occurred.Show worked answer →
Compare carrying value with proceeds, then explain the underlying cause for 3 marks.
The carrying value at disposal = cost 20 000 - accumulated depreciation 15 000 = $5 000. The computers were sold for only $3 000, which is $2 000 less than carrying value, so a loss arose.
The cause is that depreciation charged over the asset's life was too low: the estimates of useful life and/or residual value were inaccurate, so accumulated depreciation did not reduce the carrying amount enough to reflect the actual fall in the asset's value. As a result the asset was carried at more than it could be sold for, producing a loss on disposal.