Disposal of Non-Current Assets (Cambridge (CIE) IGCSE Accounting)

Exam Tip

Do not include the sale of a non-current asset in the sales account! The sales account is just for the sale of goods. The sale of a non-current asset will be detailed in a disposal account.

Exam Tip

Check whether the question says there is a depreciation charge for the non-current asset in the year of sale. If there is then calculate that year’s depreciation and include it in the provision for depreciation account before working out the net book value.

Worked Example

Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges depreciation at 20% per annum using the straight-line method. 

Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in the year the equipment is purchased and none in the year it is sold.

Calculate the gain or loss on disposal of the equipment.

Answer

• STEP 1 - Calculate the net book value

  • Calculate the yearly depreciation charge

    • 20% ✕ $30 000 = $6 000

  • Calculate the total provision for depreciation

    • Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023

    • No depreciation is charged in the year of sale

    • 3 ✕ $6 000 = $18 000

  • Calculate the net book value

    • $30 000 - $18 000 = $12 000

• STEP 2 - Calculate the difference between the sale proceeds and the net book value

  • $13 000 - $12 000 = $1 000

• STEP 3 - The sale proceeds are higher than the net book value therefore it is a profit

Profit of $1 000

Exam Tip

The disposals account should balance. If it does not balance, then check for any mistakes. Some students calculate the profit or loss by completing steps 1 to 3 and then finding the amount needed to balance the disposal account. If you use this method, be extra careful that you put the entries on the correct side.

Worked Example

Riz owes an embroidery business and owns machinery. Riz purchased an additional machine on 1 March 2022 for $30 000. Riz depreciates machinery using the straight-line method using the assumption that machinery fully depreciates after five years. Riz charges depreciation at the end of each month. Riz sells this additional machinery on 31 December 2023 and receives a cheque for $17 500. No other non-current assets were sold in the financial year ending 29 February 2024.

Prepare the disposal account for machinery for the year ended 29 February 2024.

Answer

• Calculate the yearly depreciation charge

  • $30 000 ÷ 5 = $6 000

• Calculate the monthly depreciation charge

  • $6 000 ÷ 12 = $500

• Calculate the number of months that Riz owned the machinery

  • 1 March 2022 to 31 December 2023 is 22 months.

• Calculate the total depreciation of the machinery

  • 22 ✕ $500 = $11 000

• Calculate the net book value at 31 December 2023

  • $30 000 - $11 000 = $19 000

• Calculate the loss on the sale

  • $19 000 - $17 500 = $1 500

• The sale proceeds are less than the net book value so it was a loss

Fill in the disposal account

1. Enter the original cost on the debit side

2. Enter the total depreciation on the credit side

3. Enter the sale proceeds on the credit side

4. Enter the loss on the credit side

Riz
Disposal Account