Lesson 4 ... the last one!

Lesson 4

The trade-in of a non current asset (NCA) which leads to a profit on the disposal.

Example.  
The old Boardroom Table at 30/6/17:
Boardroom Table     $12 000
less Accum. Deprec. $8 500    $3 500

The owner has picked out a new boardroom table which has a price of $18 000 plus GST.  The vendor, Ace Traders, has agreed on a trade-in allowance of $5 000 on the old boardroom table.

The $5 000 trade-in allowance is $1 500 more than the carrying value of $3 500 on the old boardroom table, thus this $1 500 is a profit on disposal.

Recording:
General Journal entries

Dr:  Disposal Boardroom Table  $12 000
Cr:  Boardroom Table $12 000
... transfer of historical cost to disposal account

Dr:  Accum Depreciation Boardroom Table  $8 500
Cr:  Disposal Boardroom Table $8 500
 ... transfer of accum depreciation to disposal account

Dr:  Disposal Boardroom Table $1 500
Cr:  Profit on disposal boardroom table $1 500
... profit on disposal of boardroom table

Dr:  Sundry creditor/Ace Traders $5 000
Cr:  Disposal Boardroom Table $5 000
... trade-in allowance on old boardroom table

Dr:  Boardroom Table $18 000
Dr:  GST Clearing $1 800
Cr:  Sundry creditor/Ace Traders $19 800
... purchase of new boardroom table from Ace Traders


Key Accounts
                                                                  
                                                                 Disposal Boardroom Table
1/7/17  Boardroom table                $12 000       1/7/17  Accum Deprec BRTable  $8 500
              Profit disposal                    $1 500                        Sundry creditor/Ace        $5 000
                                                                                                
                                                            $13 500                                                                    $13 500

                                                           Sundry Creditor:  Ace Traders
1/7/17  Disposal BRTable              $5 000         1/7/17    BRTable/GST Clr.          $19 800
                                                                                                                                                                     
                                                                     Boardroom Table
1/7/17  Balance                                $12 000       1/7/17    Disposal BRTable             $12 000
             Sundry Creditor Ace         $18 000

Reporting

Cash Flow Statement 
No impact!

Income Statement
Add Other Revenue
Profit Disposal Boardroom Table $1 500

Balance Sheet (accounting equation)
Assets:
Increase in new Boardroom Table $18 000
Decrease in carrying-value of old boardroom table $3 500
thus net increase $14 500

Liabilities
Decrease GST clearing $1 800
Increase Sundry Creditor:  Ace $19 800
Decrease Sundry Creditors (allowance):  Ace $5 000
Thus net increase $13 000

Owner's Equity
Increase $1 500 due to profit on disposal boardroom table.

Thus the net change in equities, increase of $14 500, equals the increase in net assets.

Summary
What caused the profit on disposal $1 500?
1.  The proceeds of disposal, $5 000 was more than the carrying-value of $3 500.
2.  The boardroom table was over-depreciated over its useful life due to under-estimating the scrap value and/or the estimated useful life.

We have now covered the four scenarios:
1.  Sell NCA for cash which leads to a loss on disposal
2.  Sell NCA for cash which leads to a profit on disposal
3.  Trade-in old NCA for a new NCA which leads to a loss on disposal
4.  Trade-in old NCA for a new NCA which leads to a profit on disposal

You should also appreciate what causes ...
a profit on disposal of a NCA ... and/or
a loss on disposal of a NCA