Disposal Account (Cambridge (CIE) AS Accounting): Revision Note

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.

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 profit or loss on the sale

• 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

Taz is a trader and his accounting year runs to 31 December. On 31 December 2025, Taz purchased a new vehicle costing $25 000. Taz used an old vehicle as part exchange. Taz made a payment of $10 000. The old vehicle was purchased on 1 January 2024 and had originally cost $20 000. No other vehicles were purchased or sold during that time.

Vehicles are depreciated by 20% per annum using the reducing balance method.

(a) Prepare the vehicles at cost account for the year ending 31 December 2025 and bring down the balance on 1 January 2026.

(b) Prepare the vehicle disposal account.

Answer:

(a)

Calculate the value of the reduction offered in the part exchange

$25 000 - $10 000 = $15 000

Fill in the vehicles at cost account

1. Enter the original cost of the old vehicle on the debit side at the start of the year as the opening balance

2. Enter the original cost of the old vehicle on the credit side when it is part exchanged

3. Enter the amount allowed for the part exchange on the debit side

4. Enter the amount paid on the debit side

5. Balance

Taz
Vehicles at Cost Account

(b)

Calculate the accumulated depreciation and net book value of the old vehicle when it was part exchanged

• Depreciation for the year ending 31 December 2024

20% × $20 000 = $4 000

• Net book value on 31 December 2024

$20 000 - $4 000 = $16 000

• Depreciation for the year ending 31 December 2025

20% × $16 000 = $3 200

• Net book value on 31 December 2025

$16 000 - $3 200 = $12 800

• Accumulated depreciation on 31 December 2025

$4 000 + $3 200 = $7 200

Calculate the profit or loss on disposal by finding the difference between this amount and the net book value

• This is a profit as the net book value is lower than the reduction

$15 000 - $12 800 = $2 200

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 amount allowed for the part exchange on the credit side

4. Enter the profit on the debit side

Taz
Disposal Account