Fixed Assets: Asset disposal

Fixed Assets Fixed assets are resources owned and controlled by the entity. Also known as tangible assets are assets expected to last longer than 12 months Fixed assets are used to either render services, create inventory or to aid with business activities. Examples of fixed assets: Land and Buildings, vehicles and office equipment

Fixed Assets (cont..) During the financial year assets lose their value due to use and are depreciated. Depreciation lessens the carrying value of the asset, not the price it was purchased for. Fixed assets aren’t sold during normal business activities, but can be sold. This type of sale is called Asset Disposal

Assets can be disposed of by 1.Cash 3. Trade-in 2. Credit 4. Donations/Scrap

5 Steps of asset disposal Transfer the cost of the fixed asset to the asset disposal account Calculate and depreciate the asset to date of sale. Transfer total accumulated depreciation on asset to asset disposal Record the proceeds(no proceeds in case of donation/scrap) Calculate the profit or loss on sale of asset

Example 1 Park of Fun owns a bumper car arena. The arena and its 10 cars were purchased for R100 000, 3 years ago and it depreciated R10 000 per year. In the middle of the 4th year it was sold for: (a) R72 000 cash (b) R72 000 on credit Record the sale of the asset in general ledger accounts at 30 June 2y10

Example 1: Answer: Journal entries Step Description Debit Credit 1. Transfer the cost Dr Asset Disposal Cr Equipment: Bumper Car Arena R100 000 2. Depreciate asset Dr Depreciation: Bumper Car Arena Cr Accumulated Depreciation R 5 000 3. Transfer depreciation Dr Accumulated Depreciation: Bumper Car Cr Asset disposal R35 000 4. Record proceeds Dr Bank Cr Asset Disposal R72 000 5.Calculate profit or loss Dr Profit & Loss (profit) R 7000 R 7 000

Example 1(a): Answer(cont..): Asset disposal account Date Description Amount 30 Jun 10 Equipment: Bumper car arena 100 000 Accumulated Depreciation 35 000 Bank 70 000 Profit & Loss account 5 000 105 000

Example 1(b) credit: Answer: Journal entries Step Description Debit Credit 1. Transfer the cost Dr Asset Disposal Cr Equipment: Bumper Car Arena R100 000 2. Depreciate asset Dr Depreciation: Bumper Car Arena Cr Accumulated Depreciation R 5 000 3. Transfer depreciation Dr Accumulated Depreciation: Bumper Car Cr Asset disposal R35 000 4. Record proceeds Dr Debtors Control Cr Asset Disposal R72 000 5.Calculate profit or loss Dr Profit & Loss (profit) R 7000 R 7 000

Example 1(b) credit: Answer(cont..): Asset disposal account Date Description Amount 30 Jun 10 Equipment: Bumper car arena 100 000 Accumulated Depreciation 35 000 Debtors Control 70 000 Profit & Loss account 5 000 105 000

Example 2 Park of Fun also owns their own 20 seater shuttle minibus. The minibus was bought for R80 000, 5 years ago. The vehicle is depreciated R12 000 every year. In the 8th month of the 6th year Park of fun traded in the old minibus for a newer model costing R90 000 and paid R40 000 cash. Show the journal entries for the sale and purchase on 31 August x10

Example 2: Answer: Journal entries Step Description Debit Credit 1. Transfer the cost Dr Asset Disposal Cr Vehicle: MiniBus R80 000 2. Depreciate asset Dr Depreciation: old MiniBus Cr Accumulated Depreciation R 8 000 3. Transfer depreciation Dr Accumulated Depreciation: Bumper Car Cr Asset disposal R68 000 4. Purchase new vehicle and Record proceeds Dr Vehicle: new minibus Cr Bank Cr Asset Disposal R90 000 R10 000 5.Calculate profit or loss Cr Profit & Loss (loss) R 2000 R2000

Example 2: Answer: Asset disposal account Date Description Amount 31 Aug 10 Vehicles: minibus 80 000 Accumulated Depreciation 68 000 Bank Vehicles: new minibus 10 000 Profit & Loss account 2 000

Example 2: Answer: Vehicles account Date Description Amount 1 Jan 10 Balance 80 000 31 Aug 10 Asset disposal Bank 90 000 Asset Disposal 10 000 170 000 1 Jan 11