Account for the disposal of a non-current asset and calculate the resulting profit or loss on disposal

What this dot point is asking

SEAB wants you to account for the disposal of a non-current asset and to calculate the profit or loss on disposal. When an asset is sold, scrapped or traded in, its records must be removed and any difference between proceeds and carrying amount recognised. The central insight is that a profit or loss on disposal is really a correction of past depreciation estimates: it arises because the carrying amount, based on estimated life and residual value, rarely equals what the asset actually fetches.

The answer

The disposal account

To remove an asset cleanly, a disposal account is opened and three transfers are made:

1. Transfer the asset's cost out of the asset account (debit disposal, credit asset).
2. Transfer the accumulated depreciation out (debit accumulated depreciation, credit disposal).
3. Record the proceeds received (debit cash or receivable, credit disposal).

The balancing figure on the disposal account is the profit or loss, transferred to the income statement.

The profit or loss

The result is simply the proceeds compared with the carrying amount:

where carrying amount is cost less accumulated depreciation at the date of sale. Proceeds above carrying amount give a profit; below give a loss. This profit or loss is a separate line in the income statement, not part of gross profit.

Trade-ins and part-exchange

When an old asset is traded in against a new one, the trade-in allowance is the effective proceeds for the old asset, credited to the disposal account. The new asset is recorded at its full cost, with the trade-in allowance reducing the cash that must be paid. The disposal calculation is otherwise identical.

Examples in context

Example 1. Scrapping an asset for nothing. A machine costing \15,000$with$\$13\,000$ accumulated depreciation is scrapped with no proceeds. Its carrying amount is \2,000$, so the loss on disposal is$0 - 2,000 = \$2\,000$. The disposal account removes the cost and depreciation, and the \2,000$ loss goes to the income statement, showing the firm slightly under-depreciated the machine over its life.

Example 2. Selling at a profit. A delivery van costing \28,000$with$\$24\,000$ accumulated depreciation is sold for \6,000$. Carrying amount is$\$4\,000$, so the profit on disposal is 6\,000 - 4\,000 = \2,000$. The profit signals the van was depreciated faster than its actual value loss, and it appears as a separate credit in the income statement, distinct from trading profit.

Try this

Q1. An asset cost \20,000$with$\$15\,000$ accumulated depreciation, sold for \3,000$. Find the profit or loss. [2 marks]

• Cue. Carrying amount = 20\,000 - 15\,000 = \5,000$; result$= 3,000 - 5,000 = -\$2\,000$, a \2,000$ loss.

Q2. State the three transfers made to the disposal account. [3 marks]

• Cue. Transfer in the asset's cost (debit disposal), transfer out the accumulated depreciation (credit disposal), and record the proceeds (credit disposal); the balance is the profit or loss.

Q3. Explain why a profit on disposal arises. [2 marks]

• Cue. The asset sold for more than its carrying amount, meaning it had been depreciated more quickly than its actual loss in value, so the excess is recognised as a profit on disposal.