Question 6.4: Disposal of a non-current asset A business purchased a machi...
Disposal of a non-current asset
A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an estimated residual value of $3,000 and a life of eight years. The machine was sold for $18,600 on 31 December 20X4, the last day of the accounting year of the business. To make the sale, the business had to incur dismantling costs and costs of transporting the machine to the buyer’s premises. These amounted to $1,200.
The business uses the straight line method of depreciation. What was the profit or loss on disposal of the machine?
Annual depreciation \frac{\$\left(35,000-3000\right) }{8 years}=\$4,000 per annum
It is assumed that in 20X1 only six months’ depreciation was charged, because the asset was purchased six months into the year.
| $ | $ | |
| Non-current asset at cost | 35,000 | |
| Depreciation in 20X1 (½ year) | 2,000 | |
| 20X2, 20X3 and 20X4 | \underline{12,000} | |
| Accumulated depreciation | \underline{14,000} | |
| Carrying amount at date of disposal | 21,000 | |
| Sale price | 18,600 | |
| Costs incurred in making the sale | \underline{(1,200)} | |
| Net sale price | \underline{17,400} | |
| Loss on disposal | \underline{\underline{(3,600)}} |
This loss will be shown as an expense in the income statement of the business, below gross profit.