Lesson 2
Assume you want to sell an old computer. At 30th June 2024 the following is provided:
$ $
Computer 4 700
-Accumulated depreciation 2 300 2 400
$2 400 is the carrying-value. Assume you sell the computer, on 30/6/24, for cash and receive $3 000 (market value). The proceeds of disposal, $3 000, is more than the carrying-value, $2 400, so a profit on disposal of $600 occurs.
The $3 000 (market value) is recorded in the Cash Receipts Journal as 'Disposal of Computer'. There is no GST on the sale on the VCA course. Remember that. At the end of the month the $3 000 would be posted to the credit side of the Disposal of Computer account, the cross reference is 'Bank'.
General Journal entries
Dr: Disposal of Computer $4 700
Cr: Computer $4 700
Dr: Accum Deprec Computer $2 300
Cr: Disposal Computer $2 300
Dr: Disposal Computer $600
Cr: Profit Disposal Computer $600
Of course these entries would then be posted to the ledger.
The Disposal of Computer account would appear (sort of)
Disposal Computer
30/6/24 Computer $4 700 30/6/24 Accum Deprec Computer $2 300
Profit disposal computer $600 Bank $3 000
$5 300 $5 300
Reporting
Cash Flow Statement
Investing Activities
Proceeds Disposal Computer $3 000
Income Statement
Add Other Revenue
Profit Disposal Computer $600
Balance Sheet (accounting equation)
Assets:
Increase in Bank $3 000
Decrease in carrying-value of computer $2 400
Thus net increase $600.
Liabilities
No impact
Owner's Equity
Increase $600 due to profit on disposal computer.
Summary
What caused the profit on disposal $600?
1. The proceeds of disposal, $3 000 was more than the carrying-value of $2 400.
2. The computer was over-depreciated over its useful life due to under estimating the scrap value and/or the estimated useful life.
Stay tuned for lesson 3 in a few days!
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