Question 4.8: A vehicle was purchased for $30,000 three years ago. It has ...
A vehicle was purchased for $30,000 three years ago. It has been depreciated at 20% per annum straight line, resulting in a net book value of $12,000. It was sold for $14,000. Using a first-principles approach, we can see that the depreciation has been overcharged by $2,000. The estimated depreciation over the three years was 60% of cost—$18,000—while the actual depreciation is $16,000. So, when the vehicle is disposed of, it will result in a reduction in the expense, which effectively increases the profit figure.
It is common when disposing of non-current assets to use a disposal account. The two amounts relating to the particular asset being sold, namely cost and accumulated depreciation, are transferred to the disposal account. The entries in the journal and ledger accounts are therefore:
Debit disposal account, credit vehicle account—with the cost of the vehicle being disposed of, $30,000.
Debit accumulated depreciation account, credit disposal account—with the accumulated depreciation for the vehicle, $18,000.
The sale will lead to some proceeds, either in the form of cash or in some kind of trade-in allowance. This will result in the following entries in the accounts for a cash sale:
Debit cash, credit disposal account—with the amount of the proceeds, $14,000
Or, for a sale using a trade-in, the entries will be as follows:
Debit an asset account (whatever you are trading in for) with the agreed value, credit disposal account, $14,000.
The balance on the disposal account will then be transferred to the profit and loss account, as shown below:
| Disposal account | |||||
| Dec 31 | Vehicles—cost | 30,000 | Dec 31 | Accumulated depreciation—vehicles | 18,000 |
| Profit and loss account | 2,000 | Cash | 14,000 | ||
| 32,000 | 32,000 | ||||
In this case the double entry would be a credit to the profit and loss account, representing a surplus on disposal:
| Profit and loss | |||||
| Dec 31 | Disposal | 2,000 | |||