Lesson 1
The first section is about selling a NCA for cash and making a loss. What does this mean?
Example.
On 1/7/15 (today) the business sells its old boardroom table (NCA) for $200. (no GST on the sale in the VCE study design).
On the date of the disposal (or sale), the carrying-value was $400. (Remember that the carrying-value is historical cost, $3000, less accumulated depreciation $2600.) This means the business received $200 less than the carrying-value ... this is a loss on the disposal of the boardroom table.
We have to 'zero' the Boardroom Table ledger account so credit it with the historical cost of the boardroom table.
General Journal:
Dr: Disposal of Boardroom table $3000
Cr: Boardroom table $3000
We also have to 'zero' the Accumulated Depreciation Boardroom Table ledger account so debit it with this value.
General Journal:
Dr: Accumulated depreciation boardroom table $2600
Cr: Disposal of Boardroom table $2600
The Disposal of Boardroom Table account has now 'collected' the historical cost, $3000, and the accumulated depreciation, $2600. So we can easily determine the carrying-value of $400. The credit side of this account will also 'collect' the cash proceeds of the sale, $200, using the cross-reference, 'Bank'. Now complete the account. This means 'find the balance of $200 on the credit side (so both sides add up to the same value, $3000). This $200 'balance' is the loss on disposal of the boardroom table since the proceeds of sale, $200 was $200 less than the carrying-value of $400. Thus the corresponding debit entry goes to 'Loss on Disposal of Boardroom Table'. This account is an expense and will be reported under 'Other Expenses' in the Income Statement.
The loss on disposal is recorded in the General Journal:
Dr: Loss on disposal of Boardroom Table $200
Cr: Disposal of Boardroom Table $200
Why is this ledger (Loss on Disposal of Boardroom Table) an expense?
Because it fits the definition of an expense! An expense is a ... decrease in an asset .... etc. The net change in assets due to this transaction is a decrease of $200. This is due to an increase of $200 due to cash and a decrease of $400 due to the carrying-value, thus a net decrease of $200.
Reports?
Cash Flow Statement
The $200 received is reported in the Investing Activities section of the Cash Flow Statement as Proceeds of Disposal Boardroom Table.
Income Statement
The loss on disposal boardroom table is reported as an expense under 'Other Expenses' in the Income Statement.
Balance Sheet
There is no boardroom table now!
Assets:
Thus assets have decreased by $400 (the carrying-value) and increased by $200 cash ... a net decrease of $200.
Liabilities:
No impact.
Owner's equity:
Decrease of $200 due to Loss on Disposal of Boardroom Table.
Summary.
What caused the $200 loss on disposal of boardroom table?
If that was an exam question ... here is the answer!
The proceeds of disposal, $200 (the market-value), was less than the carrying-value of the non current asset, $400.
The boardroom table was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life of the boardroom table. (remember that)
... stay tuned during the holidays for the next parts of this holiday homework topic.
