Chapter 5 - Disposal of non current assets Flashcards
(35 cards)
what happens when the proceeds are greater than the carrying amount
we get a profit on disposal
what happens when the proceeds are less than the carrying amount
we get a loss on disposal
what is the three step process for dealing with a disposal (step 1/3)
step 1 - as we don’t need the asset we cant show it as an asset, therefore we have to transfer the cost of the asset out of the non current asset account and into a special disposal account
debit - disposal account (this is the account where we calculate profit or loss on disposal)
credit - non current asset cost (this removes the debit that was reflecting the asset)
what is the three step process for dealing with a disposal (step 2/3)
step 2 - as we have removed the cost of the the asset we don’t need the accumulated depreciation against that value. we therefore need to remove all the accumulated depreciation that has been charged against the asset
debit accumulated depreciation (as this was a credit balance)
credit disposal account (so we can work out profit or loss on disposal)
what is the three step process for dealing with a disposal (step 3/3)
step 3 - post the sale proceeds to the disposal account
debit cash (as we are receiving some money for disposing of it)
credit disposal account ( to compare against the carrying amount already posted there in steps 1 and 2)
what is part exchange allowance
when purchasing a new asset instead of paying the full price we may part exchange an old asset as part payment for the new one. the part exchange allowance must be accounted for.
how is the part exchange allowance accounted for
add it to the cost of the new asset (as the cash we pay will not be the full price) and this part exchange allowance is effectively the sale proceeds we have got for the old asset so we have to include it in the disposal account
what is the journal entry that needs to be made for a part exchange
debit non current asset cost (for the new asset)
credit disposal account (as though sale proceeds)
what is the four step process for dealing with the disposal of a part exchanged asset - part 1 /4
step 1 - transfer the cost of the old asset to the disposal account
debit disposal account (P&L)
credit non current asset cost (B/S)
what is the four step process for dealing with the disposal of a part exchanged asset - part 2/4
remove all the accumulated depreciation that has been charged on the old asset
debit accumulated depreciation
credit disposal account
what is the four step process for dealing with the disposal of an asset - part 3/4
step 3 - although we are not selling the old asset for cash we are still getting some value for it.
the value needs to be brought into the disposal account to help calculate the profit or loss on disposal. however we don’t debit cash (as we are not receiving any) we debit a new non current asset as we are receiving part of the new asset
debit non current asset cost
credit disposal account ( as with step 3 for a normal disposal)
What is the four step process for dealing with the disposal of an asset - part 4/4
post the additional cash paid for the new asset we have purchased
debit non current asset cost (to add to the debit in step 3)
credit cash (we are reducing our cash asset)
what happens if proceeds are greater than the carrying amount (CA)
we get a profit on disposal. A profit means we have charged too much depreciation in previous years so we will credit the profit on disposal to the P&L account. we credit the sundry income in the statement of profit or loss
what is the journal entry for recording a profit on disposal
debit disposal account (balancing figure to balance off the account)
credit profit or loss account (as additional income in our statement of profit or loss)
what happens if proceeds are less than the carrying amount (CA)
we get a disposal. a loss means we did not charge enough depreciation in previous years so we will debit the loss to the P&L account. we debit an expense in the statement of profit or loss
what is the journal entry for recording a loss on disposal
debit profit or loss account (as an additional expense in our statement of profit or loss)
credit disposal account (balancing figure to balance off the accounts)
why do we account for disposals
- to remove the asset cost and accumulated depreciation as we no longer have the asset
- recognize too much or little expense (depreciation) being charges through a profit or loss on disposal
what does an accrual do
accruals are expenses which have been incurred by a business during an accounting period but at the period end no invoice has been received so they haven’t been paid yet. Accruals relate to expenses that have been paid in arrears.
what is a prepayment
a prepayment arises when we have paid for an item of expense before we have used it. prepayments are expenses paid for in advance.
what is the entry to account for an accrual
debit expense (statement of profit or loss) - debit the expense as we have used the goods or services but not paid for them so initially they are understated.
credit accrual (statement of financial position) - credit an accrual account (which is a current liability) because we have not yet paid for the expense, this has the effect of showing a liability on the statement of financial position
what is the double entry for prepayments
debit prepayments (statement of financial position - current asset) - we have not used the goods and services we have paid for. This is now an asset of the business as we are owed the service we have paid for in advance
credit expense (statement of profit or loss) - we credit an expense as we need to reduce the total expense. part of the cash paid relates to next years expenses but is currently included in this year. when the cash was paid the full amount would have been a debit to the expense account and a credit to the cash
what should be considered with subsequent years regarding accruals and prepayment
we will have an asset or a liability brought forward on the statement of financial position (prepayment or accrual account) at the start of the next year
what has to be done to reverse an accrual
debit accrual
credit expense
what is the double entry to reverse a prepayment
debit expense
credit prepayment
