Accounting for Disposals

ABC LTD purchased a machine for $2000 on 1st January 2001 which had a useful life of 5 years and an estimated residual value of $500. The machine was being depreciated on straight line basis. However, ABC LTD decided to sell the asset on1 January 2003 for $1500 in order to raise cash for the purchase of a new machine.

The disposal of the fixed asset will be recorded as follows:

• Record cash received or the receivable arising from the sale:

  Debit     Cash     $1,500

• Remove the asset from the balance sheet

  As a fixed asset is recognized in the balance sheet at the Net Book Value (i.e. Cost less Accumulated Depreciation), the machine will be removed from the accounts of ABC LTD in two parts:

  First, the Machine Cost must be removed by crediting the ledger:

  Credit   Machine Cost  $2,500

  Second, the Accumulated Depreciation in respect of the machine must be removed by debiting the ledger:

  Debit   Accumulated Depreciation    $600*

  *Accumulated Depreciation: (2000 – 500)/5 x 2 Years

  The combined effect of the above two transactions would be to remove the machine’s net book value of $1400 (2000 – 600) from the balance sheet.

• Recognize the resulting gain or loss on the sale of machine

  ABC LTD received $1500 for an asset with a balance sheet worth of $1400. It therefore earned a gain of $100. The gain will be recorded as follows:

  Credit  Gain on Disposal  $100