AC09

Buy First, Sell Later

 Learning Outcomes

1. Prepare ledger entries to record the acquisition of non-

current assets, using separate accounts for non-current
assets at cost;

2. Illustrate the ledger entries to record the acquisition disposal

of non-current assets, using separate accounts for non-
current assets at cost and accumulated depreciation;

3. Explain and illustrate the inclusion of gains and losses on

disposal in the Statement of Comprehensive Income; and

4. Demonstrate the recording of non-current assets revaluation

in ledger accounts and in the Statement of Financial Position.
 Problem Analysis
Tees Studio Ltd

Digital Printing Leasehold Shop

Delivery Van Freehold Land
Machine House

• Bought on 8 Dec • Old van bought on 15 • Bought on 1 April • Bought on 1 April

2006 for $24,000 October 2006 for 2006 for 2007 for
• Depreciation of $36,000 $900,000 $450,000
20% on cost per • New van bought on 1 • Valuation as at 31 • Leasehold term is
annum Jan 2009 cost March 2009 is 20 years
• Sold on 30 Jan $52,000 $1,200,000 • Valuation as at 31
2009 for $15,000 • Old van exchanged March 2009 is
cash for new van at agreed $350,000
value $20,000;
balance of $32,000
paid in cash
• New van’s scrap
value is $15,000
• Both vans useful life
= 10 years
 Recap

In AC08, we learnt about:

Capital Expenditure versus Revenue Expenditure

Different depreciation methods

Calculating the depreciation expense
Disposal of Non-Current Assets

A non-current asset can be disposed in the following

ways:

 Sold for cash;

 Traded in as part payment for another asset, at or

before the end of its useful life; or

 Discarded away.
 Gain / Loss on Disposal
of Non-Current Assets
Upon disposal of non-current assets, a company can make a
gain or loss on disposal, depending on the value of the
assets that it received, which can be in cash or other assets.

In order to determine whether a company is making a gain or a

loss on disposal of its non-current assets, we will compare the
net book value of the non-current assets against the value (of
assets) that it received.

Net book value of an asset is defined as:

The value of an asset on the books of the company.
Net book value = Cost – Accumulated depreciation
Depreciation of the asset is to be recorded up to the date of
disposal.
 Gain / Loss on Disposal
of Non-Current Assets
Question: So how do we determine whether the disposal
of a fixed assets resulted in a gain or a loss?
Loss on
Sales Net book
Less than disposal
proceeds value
(expense)
Gain on
Sales Net book
More than disposal
proceeds value
(income)
This gain or loss on disposal of the non-current assets is not
a profit or loss within the normal operations of a business.
 2 Methods to Record Disposal of
Non-Current Assets
There are 2 ways in which we can account for the disposal of
Non-Current Assets:

1) Using a separate DISPOSAL ACCOUNT

2) No separate Disposal Account is being used
 Disposal of Non-Current Assets –
Using Separate DISPOSAL ACCOUNT
One method to account for disposal of non-current assets is to
use a special account, called DISPOSAL ACCOUNT. This
separate account will be created to record all entries arising
from disposal of the non-current assets.

Question
What are the entries to be recorded when a fixed
asset is sold?
Journal entry 1

Date Dr Disposal Account XX

Cr Non-Current Assets XX

(To record the disposal of the cost of non-current assets)

 Disposal of Non-Current Assets –
Using Separate DISPOSAL ACCOUNT

Journal Entry 2
Date Dr Accumulated depreciation XX
Cr Disposal Account XX

(To record the disposal of non-current assets – business does not need
to maintain the accumulated depreciation account)

Journal Entry 3
Date Dr Cash XX
Cr Disposal Account XX
(To record receipt of proceeds from the sale of non-current assets)
 Disposal of Non-Current Assets –
Using Separate DISPOSAL ACCOUNT
How do we record the gain / loss made from the sale?

If it is a loss, then the following journal entry will be made:

Journal Entry 4
Date Dr Loss on disposal of non-current assets (expense) XX
Cr Disposal Account XX

(To record loss made arising from the sale of non-current asset)

If it is a gain, then the following journal entry will be made:

Journal Entry 5
Date Dr Disposal Account XX
Cr Gain on disposal of non-current assets (income) XX

(To record gain made arising from the sale of non-current asset)
 Characteristics of DISPOSAL
ACCOUNT
It will be zerorised, i.e. make zero, and closed off.

Note that there is no “Disposal Account” on the

Statement of Comprehensive Income or Statement of
Comprehensive Income. It is only a temporary account
that has been set up to transfer items related to the sale /
disposal to the Disposal Account.
 Disposal of Non-current Assets –
NO DISPOSAL ACCOUNT
Alternatively, we can record the disposal of non-current assets
without the use of a Disposal Account. It is just simply
combining all the entries into one single entry.
Loss on disposal of non-current assets
Date Dr Loss on disposal of non-current assets (expense) XX
Dr Accumulated depreciation XX
Dr Cash / Assets received XX
Cr Non-Current Assets XX
(To record disposal of non-current asset)

Gain on disposal of non-current assets

Date Dr Accumulated depreciation XX
Dr Cash / Assets received XX
Cr Non-Current Assets XX
Cr Gain on disposal of non-current assets (income) XX
(To record disposal of non-current asset)
 Revaluation of Non-Current Assets

Definition of Revaluation:
A technique that is required to accurately describe the true
value of the capital goods a business owns.
“Capital goods refer to real products that are utilized in the production of
other products but are not incorporated into other products themselves.”

The objective of revaluation is to bring into the books the fair

market value of non-current assets.

Methods of revaluation of non-current assets:

a) Current market price
b) Appraisal Method
 Revaluation of Non-Current Assets

There can be upward revaluation or downward revaluation (i.e.

impairment).
Upward
Market value / fair value > Net book value
revaluation
Downward
Market value / fair value < Net book value
revaluation
 Revaluation of Non-Current Assets

How to record revaluation gain

Since the sale has not been realized, the gain cannot be
recognized as income.

There are two possible accounting treatments:

i. Ignore the gain
ii. Recognize the increase in value of the freehold land but
recognize the gain as a reserve.

Journal entry for method (ii) stated above:

Date Dr Asset – revaluation gain XXX
Cr Asset revaluation reserve XXX
(Being recognition of the increase in value of asset
through the asset revaluation reserve)
 Revaluation of Non-Current Assets

How to record impairment loss?

Due to Prudence Concept, impairment of non-current assets
should be recorded in the financial statements so that the
assets will not be overstated.

Journal Entry:
Date Dr Impairment loss XXX
Cr Accumulated impairment loss XXX
(To record the impairment charge)
 Application to
Problem Statement
 Application
(Digital Printing Machine)
Did the business lose $14,000 from the sale of the digital
printing machine?
CALCULATION
Cost = $24,000
Depreciation expense per year = $24,000 * 20% = $4,800

We will record depreciation up to the date of disposal, which is 30 January 2009.

This is a total of 26 months from 8 Dec 2006 to 30 Jan 2009.

Depreciation to be recorded in the current financial year (1 April 2008 to 1 Jan 2009)
= Depreciation per year * 10 months / 12 months = $4,800 *10 / 12
= $4,000

Accumulated depreciation from 8 Dec 2006 to the date of disposal

= Accumulated depreciation as at 31 Mar 2008 + Accumulated depreciation as at 30
Jan 2009
= $6,400 + $4,000 = $10,400
 Application
(Digital Printing Machine)
Did the business lose $14,000 from the sale of the digital
printing machine?
CALCULATION (Continued)
Net book value as at 30 Jan 2009
= Cost – Accumulated Depreciation = $24,000 – $10,400
= $13,600

Sales proceeds = $15,000

Gain on disposal of digital printing machine

= Sales proceeds – Net book Value
= $15,000 – $13,600
= $1,400

Therefore, instead of making losses, the business is actually making a gain from the
sale of the digital printing machine.
 Application
(Digital Printing Machine)
Journal entries

Entry 1
30 Jan 09 Dr Depreciation expense $4,000
Cr Accumulated depreciation $4,000
(To record depreciation expense up till the date of disposal
for the digital printing machine)

Use of a Separate Disposal Account

Entry 2
30 Jan 09 Dr Disposal Account $24,000
Cr Digital printing machine $24,000
(To record disposal of the cost of digital printing machine)
 Application
(Digital Printing Machine)

Entry 3
30 Jan 09 Dr Accumulated depreciation $10,400
Cr Disposal Account $10,400
(To record disposal of the digital printing machine – business
does not need to maintain the accumulated depreciation account)

Entry 4
30 Jan 09 Dr Cash $15,000
Cr Disposal Account $15,000
(To record receipt of proceeds from the sale of digital printing
machine)
 Application
(Digital Printing Machine)
Entry 5
30 Jan 09 Dr Disposal Account $1,400
Cr Gain on disposal of DPM (income) $1,400
(To record the gain made arising from the sale of digital
printing machine)

No Separate Disposal Account is used

Alternatively, you can combine all the entries to record the disposal of the
digital printing machine:

30 Jan 09 Dr Accumulated depreciation $10,400

Dr Cash / Assets received $15,000
Cr Digital Printing Machine $24,000
Cr Gain on disposal of DPM (income) $1,400
(To record the sale of digital printing machine at a price
above the net book value)
 Application
(Delivery Van)
The company has sold its old delivery van in exchange of
a new delivery van.

How to account for it?

Journal entries
Entry 1
1 Jan 09 Dr Depreciation expense – old van $2,700
Cr Accumulated depreciation – old van $2,700
(To record the depreciation of the old delivery van from 1
Apr 2008 to up to the date of disposal on 1 Jan 2009
$36,000 / 10 years * 9 months/ 12 months)
 Application
(Delivery Van)
Method 1: To have separate entry to record the trade in of
the old van for the new van

Entry 2
1 Jan 09 Dr Accumulated depreciation – old van $8,100
Dr New delivery van $20,000
Dr Loss on disposal – old delivery van $7,900
Cr Old delivery van $36,000
(To record the trade in of the old delivery van for a new
delivery van at a price below the net book value)

1 Jan 09 DR New delivery van $32,000

Cr Cash $32,000
(To record the balance payment made in cash to purchase
the new delivery van)
 Application
(Delivery Van)
Method 2: To combine the journal entries in Method 1 into
one single entry to record the trade in of the old van for
the new van

Entry 3
1 Jan 09 Dr Accumulated depreciation – old van $8,100
Dr New delivery van $52,000
Dr Loss on disposal – delivery van $7,900
Cr Old delivery van $36,000
Cr Cash $32,000
(To record the trade in of the old delivery van for a new
delivery van at a price below the net book value)
 Application
(Delivery Van)
Entry 4
31 Mar 09 Dr Depreciation expense – new van $900
Cr Accumulated depreciation – new van $900
(To record the depreciation of the new delivery van from
the date of purchase 1 Jan 09 until financial year end, i.e.
31 Mar 09
($52,000 - $16,000)/ 10 years * 3 months / 12 months)
 Application
(Leasehold Shop House)
Cost of leasehold shop house = $450,000

Depreciation for leasehold shop house is usually be based on the leasehold

term.

Accumulated depreciation as at 31 March 2009

= Accumulated depreciation as at 31 March 2008 + Depreciation expense
for the year ended 31 March 2009
= $22,500 + $22,500
= $45,000

Net book value = $450,000 – $45,000 = $405,000

Downward revaluation / Impairment loss of shop house

= Net book value – market value
= $405,000 – $350,000
= $55,000
 Application
(Leasehold Shop House)

Journal Entries
Entry 1
31 Mar 09 Dr Depreciation expense – shop house $22,500
Cr Accumulated depreciation – shop house $22,500
(To record the 2009 depreciation of the shop house)

Entry 2
31 Mar 09 Dr Impairment loss on shop house $55,000
Cr Accumulated impairment loss $55,000
(To record the impairment charge for the shop house)
 Application
(Freehold Land)
Cost of Freehold Land = $900,000
Freehold land is not depreciable.

Upward revaluation gain of leasehold office

= Market value – Net book value
= $1,200,000 – $900,000
= $300,000

Journal entry to recognize the increase in value of the freehold land as a

gain to Asset Revaluation Reserve :
Entry 1
31 Mar 09 Dr Freehold Land – revaluation gain $300,000
Cr Asset revaluation reserve $300,000
(Being recognition of the increase in value of freehold land
through the asset revaluation reserve)
 Conclusion

Highlighted red items: Appear as expense items in the Statement of Comprehensive Income.

Highlighted blue items : Appear under Non-Current Assets / Shareholder’s Equity in the Statement of
Financial Position.

.
Extracts of Financial Statements
Extracts of Financial Statements
 Mindmap

Disposal of Fixed Assets

Accounting
Asset Disposal Recording Treatment

Methods of disposal Ways to record disposal • Gains on disposal

• Sold for cash • Use of a separate Sales proceeds >
• Trade-in as part DISPOSAL Account Net book value
payment for another • NO separate Disposal • Loss on disposal
asset Account is used Sales proceeds <
• Discard away Net book value
• Net Book Value
Cost – Accumulated
Depreciation
References
Websites

Accounting Standards Council,
http://www.asc.gov.sg/frs/attachments/2007/FRS_16_2009.doc , Retrieved on 20
March 2009

Wikipedia; http://en.wikipedia.org/wiki/Revaluation_of_fixed_assets, Retrieved on 20

March 2009

Textbooks

Frank Wood; Frank Wood’s Business Accounting 1, Tenth Edition 2005; FT Prentice
Hall; Chapter 26, Pages 284 to 293.

David Marshall, Wayne William McManus, Daniel Viele, Accounting what the numbers
mean, Seventh Edition 2005; McGraw-Hill Irwin; Chapter 6, Pages 190 to 236.

Betsy Li, Tan Sai Kim, Goh Ling Chin, Goh Lee Suan; Principles of Accounting, Fourth
Edition; Chapter 15; Times Media Pte Ltd; 2006

Ng Eng Juan; A practical Guide to Financial Reporting Standards (Singapore); FRS 16;
CCH Asia Pte Limited; 2003