Lesson 3

I hope you are enjoying your holidays.  

Here is lesson 3.  Trading in an old NCA for a new one ... that results in a loss on disposal.

Details about the old delivery van at 1/7/17:
Historical cost   $35 000
Accum Deprec   $28 000  $7 000

The new delivery van is $50 000 plus GST and will be purchased from Ace Motor Traders ... they have offered a trade-in allowance of $5 000 on the old van.
Thus the proceeds of disposal, $5 000 is less than the carrying-value of $7 000,  hence a loss of $2 000 occurs on the disposal of the old delivery van.

Records
Recording in the General Journal:

Dr:  Disposal of Delivery Van $35 000
Cr:  Delivery Van $35 000
... that transfers the historical cost of the delivery van to the Disposal Account


Dr:  Accumulated Depreciation Delivery Van $28 000
Cr:  Disposal of Delivery Van $28 000
... that transfers the accum deprec of the delivery van to the Disposal Account

Dr:  Sundry Creditor:  Ace Motor Traders $5 000
Cr:  Disposal Delivery Van $5 000
... that is the trade-in allowance given on the old delivery van by Ace Motor Traders

Dr:  Loss on Disposal Delivery Van $2 000
Cr:  Disposal Delivery Van $2 000
... that transfers the loss on disposal of the delivery van to the expense account, loss on disposal of delivery van.

Dr:  Delivery van $50 000
Dr:  GST clearing $5 000
Cr:  Sundry creditor:  Ace Motor Traders $55 000
... that is the credit purchase of the new delivery van

Key Accounts
                                                                  
                                                                 Disposal Delivery Van
1/7/17  Delivery Van                       $35 000       1/7/17  Accum Deprec Del. Va     $28 000
                                                                                                 Sundry creditor/Ace        $5 000
                                                                                                 Loss on disposal DV        $2 000
                                                            $35 000                                                                   $35 000

                                                           Sundry Creditor:  Ace Motor
1/7/17  Disposal DV                        $5 000         1/7/17    Delivery Van/GST Clr.    $55 000
                                                                                                                                                                     
                                                                     Delivery Van
1/7/17  Balance                                $35 000       1/7/17    Disposal DV                     $35 000
              Sundry Creditor Ace         $50 000

Reporting

Cash Flow Statement 
No impact!

Income Statement
Less Other Expenses
Loss Disposal Delivery Van $2 000

Balance Sheet (accounting equation)
Assets:
Increase in Delivery Van $50 000
Decrease in carrying-value of old delivery van $7 000
Thus net decrease $43 000

Liabilities
Decrease GST clearing $5 000
Increase Sundry Creditor:  Ace $55 000
Decrease Sundry Creditors (allowance):  Ace $5 000
Thus net increase $45 000

Owner's Equity
Decrease $2 000 due to loss on disposal delivery van.

Thus the net change in equities, decrease of $43 000, equals the decrease in net assets.

Summary
What caused the loss on disposal $2 000?
1.  The proceeds of disposal, $5 000 was less than the carrying-value of $7 000.
2.  The delivery van was under-depreciated over its useful life due to over estimating the scrap value and/or the estimated useful life.

Stay tuned for lesson 4 in a few days!