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How is the sale or trade-in of a non-current asset recorded and why does a profit or loss on disposal arise?

Recording the disposal of non-current assets, including by sale and trade-in, calculating the profit or loss on disposal and explaining its cause

A focused VCE Accounting Unit 4 Area of Study 1 answer on disposal of non-current assets. Shows the disposal account entries for sale and trade-in, calculates carrying amount and the resulting profit or loss on disposal, and explains why the loss or gain reflects inaccurate depreciation estimates.

Generated by Claude Opus 4.76 min answer

Reviewed by: AI editorial process; not yet individually human-reviewed

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  1. What this dot point is asking
  2. The disposal process
  3. Why a profit or loss arises
  4. Effect on the reports
  5. Ethical considerations

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 steps are:

  1. Record depreciation up to the date of disposal so the carrying amount is current.
  2. Transfer the asset's cost to the Disposal account (Debit Disposal, Credit Asset).
  3. Transfer the accumulated depreciation to the Disposal account (Debit Accumulated Depreciation, Credit Disposal).
  4. 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.
  5. 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.

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.

Exam-style practice questions

Practice questions written in the style of VCAA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

2022 VCAA5 marksE-Sortz reports monthly. Its Balance Sheet at 31 May 2022 showed Van 45000lessAccumulatedDepreciationofVan45 000 less Accumulated Depreciation of Van 37 000 (carrying value 8000).Depreciationis308 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.
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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 8000):8000x308 000): 8 000 x 30% x 1/12 = 200. Accumulated Depreciation becomes 37 000 + 200 = 37200,socarryingvalueat1July=37 200, so carrying value at 1 July = 7 800.

Disposal of Van account:

Debit side: Van $45 000.
Credit side: Accumulated Depreciation of Van 37200;Bank37 200; Bank 5 000 (proceeds, GST excluded); Loss on Disposal of Van $2 800.
Totals: 45000=45 000 = 45 000.

Loss = carrying value 7 800 - proceeds 5 000 = 2800.Marks:vancost,updatedaccumulateddepreciation2 800. Marks: van cost, updated accumulated depreciation 37 200, 5000proceeds,andthe5 000 proceeds, and the 2 800 loss.

2020 VCAA3 marksThe Disposal of Computers account of Keyword Computers shows Computers 20000(debit),andonthecreditsideAccumulatedDepreciationofComputers20 000 (debit), and on the credit side Accumulated Depreciation of Computers 15 000, Bank 3000andLossonDisposalofComputers3 000 and Loss on Disposal of Computers 2 000. Explain why the loss on disposal of the computers has occurred.
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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 = 5000∗∗.Thecomputersweresoldforonly∗∗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.