Disposal of tangible non-current asset

This chapter explains the accounting treatment for disposals of tangible non-current assets. You’ll learn how to record disposals and part-exchange transactions in line with IFRS Accounting Standards, including how to calculate and record any gain or loss on disposal. The chapter also introduces disclosure requirements under IAS 16 (including PPE schedules) and explains how a non-current asset register supports asset tracking and financial reporting.

Learning objectives

By the end of this chapter, you should be able to:

• Record the acquisition and disposal of tangible non-current assets in the general ledger accounts in accordance with IFRS Accounting Standards.
• Calculate and record gains or losses on disposal of tangible non-current assets in the statement of profit or loss, including part exchange transactions.

Introduction

Businesses sometimes dispose of tangible non-current assets before the end of their useful life, or at the end of their useful life when a residual value remains. Because selling non-current assets isn’t part of normal trading activities, the proceeds are treated as capital income, not business revenue.

A disposal is recorded through a disposal of non-current assets process. This process removes the asset from the accounting records and reports any resulting gain or loss in the statement of profit or loss.

Definitions

Gain on disposal of non-current asset

A gain arises when the asset’s carrying amount at the date of sale is less than the net proceeds.

Loss on disposal of non-current asset

A loss arises when the asset’s carrying amount at the date of sale is greater than the net proceeds.

Accounting for disposal of non-current asset

When a tangible non-current asset is acquired, it’s recorded in the non-current asset ledger. At each year-end, depreciation is charged to profit or loss, with the corresponding credit posted to accumulated depreciation.

When an asset is disposed of, it must be removed from the books. To do that, we transfer the asset’s cost and accumulated depreciation to a disposal of non-current asset account, record the proceeds, and then calculate the gain or loss. Upon the disposal of a tangible non-current asset:

1. Derecognize the asset, by transferring the cost from the asset account to the disposal of asset account as shown in the journal.

   Debit: Disposal of non-current asset account

   Credit: Non-current asset account

2. Derecognize the accumulated depreciation, by transferring it from the accumulated depreciation account as at the date of the sale to the disposal of asset account as shown in the journal.

   Debit: Accumulated depreciation account

   Credit: Disposal of non-current asset account

3. Record the proceeds from the disposal as shown in the journal:

   Debit: Cash or receivable account

   Credit: Disposal of non-current asset account

4. Balance off the disposal of asset accounts. There is a gain on disposal when the balancing figure is on the debit, and it is a loss on disposal when the balancing figure is on the credit.

   • When it is loss on disposal, the journal entry will be:

     Debit: Profit or loss statement

     Credit: Disposal of non-current asset account

   • When it is a gain on disposal, the journal entry will be:

     Debit: Disposal of non-current asset account

     Credit: Profit or loss statement Illustration: Disposal of tangible non-current asset

D&D Ltd acquired a factory plant for $100,000 on 1 January 20X0 with an estimated residual value of zero and depreciated over its useful life of 5 years. At the end of the year 3 (i.e., 31 December 20X2), D&D sold the plant for $45,000 cash. Illustrate the accounting treatment of the transaction in the financial statement.

Suggested Solution:

1. What is the annual depreciation?

Do you know the answer?

2. What is the accumulated depreciation at the disposal date?

Do you know the answer?

3. What is the carrying amount at the disposal date?

Do you know the answer?

4. What is the gain or loss from the disposal?

Do you know the answer?

The calculations tell you the gain or loss, but you also need to know the journal entries that record the disposal in the general ledger. The journal to account for the disposal is shown below.

Description	Debit ($)	Credit ($)
Derecognizing the factory plant cost
Disposal of asset	100,000
Factory Plant		100,000
Derecognize the accumulated depreciation
Accumulated depreciation	60,000
Disposal of asset		60,000
Recognize the proceeds from the disposal
Cash and Bank	45,000
Disposal of asset		45,000

The disposal of the asset ledger account is shown below.

Disposal of asset: Part exchange transactions

Sometimes, a business acquires a new non-current asset by exchanging an old one and paying an additional amount. The value assigned to the old asset in this arrangement is called the trade-in price.

In a part-exchange, the trade-in price is treated as the proceeds from disposal of the old asset. So, instead of crediting cash or receivables, you credit the trade-in value to the disposal account. The cost of the new asset ( trade-in value + additional cash paid) is then debited to the non-current asset account. Illustration: Part exchange transactions

D&D Ltd acquired a factory plant for $100,000 on 1 January 20X0 with an estimated residual value of zero and depreciated over its useful life of 5 years. At the end of year 3 (i.e., 31 December 20X2), D&D traded in the plant for $30,000 for the purchase of a new asset costing $120,000.

Illustrate the accounting treatment of the transaction in the financial statement.

Suggested Solution:

The step-by-step guide in the earlier illustration above should guide you to solve this question.

1. What are the journal entries to be passed for the disposal of the factory plant as well as the purchase of the new asset?

The disposal of the asset ledger account is shown below.