11.

9 Scrapping and Disposal of Assets (Asset Disposal)

ASSET DISPOSAL
The business may decide to sell a tangible asset (such as vehicles, building
equipment and buildings) because they no longer required, or it may have become
obsolete. The can be done any time during the accounting period.
The asset can be disposed of by selling on credit, for cash, trading it in, for personal
use or giving the asset away as a donation.
Depreciation on the asset needs to be calculated until the date of disposal. No
additional depreciation is provided if the transaction takes place at the beginning of
the year. Additional depreciation will have to be added on to the accumulated
depreciation if the transaction takes place during and at the end of the year.
The asset disposal account is an intermediate account into which entries are made
when an asset is disposed. The account is closed off after the asset is sold.

GENERAL LEDGER OF XXX

DR Vehicles/Building Equipment/Furniture/ETC. CR
DATE Balance b/d xxxx DATE Asset Disposal xxx(1)

xxxx xxxx

Asset Disposal
DATE Vehicles/ETC. xxx(1) DATE Accumulated Depreciation xxx(2)
Bank (cash)/Accounts
Profit and Loss Account xxx(6a) OR Receivable (credit) xxx(3)
(Profit on sale of asset) Profit and Loss Account xxx(6b)
(Loss on sale of asset)
xxxx xxxx

Accumulated Depreciation: Vehicles

xxx PREVIOUS
DATE Asset Disposal xxx(2) DATE Balance b/d YEARS BALANCE
Depreciation xxx(5)

42 000 42 000

Depreciation
Accumulated
DATE Depreciation xxx(5)

Profit and Loss Account

DATE Asset Disposal Xxx(6b) DATE Asset Disposal xxx(6a)
(Loss on sale of asset) (Profit on sale of asset)
OR
REMEMBER: Profit and loss account balances the Asset Disposal Account, this
determines if it is a profit (DR) or loss (CR)

EXERCISES
Remember the following steps:
1. Take the asset from the asset account over to the Disposal account at Cost
price.
2. Take the total of the Accumulated Depreciation over to the Disposal account.
(From the date you have bought it to the date you have sold it.)
3. Enter the sale (Bank / Accounts Receivable).
4. Balance the Disposal account – the difference will be the profit or loss on the
sale of the asset.

QUESTIONS:
1. A vehicle was bought on 1 July 20x1 for R70 000. End of the finance year 30
June every year. Depreciation – 10% p.a. on cost. The vehicle was sold on 30
June 20x7 for R36 000 cash. What was the profit or loss?

2. Building equipment bought: 1 April 20x2 for R20 000. End of financial year: 31
March. Depreciation method: 5% p.a. on book value. Building equipment sold –
1 April 20x6 for R13 500 on credit. What was the profit or loss on the sale?

3. Furniture bought: 1 January 20x0 for R12 000. Financial year end – 31
December every year. The furniture was sold on 28 February for R9 600 credit.
On the date of sale the book value of the furniture was R10 000. Accumulated
depreciation to date is R1 500. Profit or loss?

4. Bakkie bought: 1 March 19x8 for R180 000. End of financial year – 28 February
each year. Depreciation – 12% p.a. on cost. Vehicle sold – 1 June 20x3 for
R104 000 cash. Was it a profit or loss on the sale of the vehicle?

5. Building equipment bought – 1 January 19x9 for R35 000. Depreciation – 5% on

reducing balance method. End of financial year – 31 December each year.
Asset sold 1 January 20x4 for R26 000 on credit. (work to nearest R)

6. Furniture bought: 30 June 20x0 for R15 000. End of financial year – 20 June.
Furniture sold – 7 July 20x4 for R11 000 on credit. The furniture was valued at
R11 500 on date of sale. Did they make a profit or loss on the sale of the asset?

7. Vehicle bought: 28 February 20x0 for R120 000. Financial year end – 30 June.
Depreciation method – 20% p.a. on book value. Vehicle sold – 30 September
20x3 for R38 650 cash. Was there a profit or a loss on the sale of this vehicle?

Required: Prepare the general ledger for the following accounts: Asset,
Accumulated Depreciation, Depreciation and Asset Disposal and Bank/Accounts
Receivable. TAKE NOTE: All amounts exclude VAT, round to the nearest rand
where necessary.

QUESTION 1 (20 MARKS)

Bully Builders decided to sell their old vehicle and buy a new one. The vehicle is a
Hilux Double Cab bakkie bought on the 1 May 2010 for R402 500(including VAT).
The bakkie is sold on 30 April 2013 for R220 000 (excluding VAT) to Mr. Beatman
on credit. Bully Builders have a year-end on the 31 December. The current year
end is the 31 December 2013. Depreciation is calculated at 15% p.a. on the
reducing balance method.

REQUIRED:
1.1 Calculate the Depreciation, Accumulated Depreciation: Vehicles and Profit or
Loss.
(Show all calculations for marks – clearly show what each amount represents)
1.2 Using your answers from 1.1, draw up the following General Ledger accounts
(balance off only Depreciation and Asset Disposal):
 Accumulated Depreciation: Vehicles (6 lines)
 Depreciation (6 lines)
 Accounts Receivable (4 lines)
 Asset Disposal (6 lines)

ROUND ALL ANSWERS TO THE NEAREST RAND

QUESTION 2 (12 MARKS)

Building equipment was bought on the 1 March 2006 for R120 000 (excluding VAT)
cash. It was used until sold on the 1 January 2011 for R75 000 (excluding VAT)
(R60 000 credit and R15 000 cash). Depreciation is calculated at 5% on cost. The
end of the financial year is 31 March.
REQUIRED:
2.1 Show the following asset disposal transactions in the General Ledger of Lucky
Builders.
SHOW ALL DEPRECIATION CALCULATIONS

QUESTION 3
Mr Barney bought a vehicle on the 31 September 20x0 for R165 000 (excluding
VAT) from Unique Cars on credit.
A few years later on the 1 October 20x8 Mr. Barney decides to sell the vehicle in
order to buy a new Jeep, he sells it for R72 632 (including VAT) on credit. The
financial year-end is 31 March every year. Depreciation is at 10% p.a. on book
value.
Required:
3.1 Did Mr. Barney make a profit or loss? Prepare only the Asset Disposal account;
show all calculations for marks, round the final amount for depreciation to the
nearest RAND.
The current year is 1 April 2008 – 31 March 2009.

QUESTION 4 (15 MARKS)

ABC Construction started trading on 1 March 2001. The owner Mr Man. U.
purchased on the 31 May 2005 a Toyota RAV, cost price R340 000 (excluding VAT).
On the 1 August 2010 Mr Man U decided to sell the Toyota RAV as he needed to
purchase Trucks. He sold the Toyota RAV for R200 000 on credit and R55 000 cash
(excluding VAT). All vehicles are depreciated at 5% p.a. on cost. The year end is the
28 February.

REQUIRED:
SHOW ALL CALCULATIONS
4.1 Prepare a Vehicles, Depreciation, Accumulated Depreciation: Vehicles and Asset
Disposal Account.

ROUND TO THE NEAREST RAND

EXERCISE: 1
Calculations Page:
Bought: 1 July 2001 - R70 000
Sold: 30 June 2007 - R36 000 (cash – Bank)
Financial Year-End: 30 June
Depreciation: 10%p.a. on cost

Calculations:
1 July 2001 – 30 June 2002 (1 year) 70 000 x 10% x 12/12 = R7 000
1July 2002 – 30 June 2003 (1 year) 70 000 x 10% x 12/12 = R7 000
1July 2003 – 30 June 2004 (1 year) 70 000 x 10% x 12/12 = R7 000
1 July 2004 – 30 June 2005 (1 year) 70 000 x 10% x 12/12 = R7 000
1 July 2005 – 30 June 2006 (1 year) 70 000 x 10% x 12/12 = R7 000
1 July 2006 – 30 June 2007 (1 year) 70 000 x 10% x 12/12 = R7 000
Accumulated Depreciation: R7 000 x 5 = R35 000
Depreciation: R7 000
Total Accumulated Depreciation: R35 000 + R7 000 = R42 000

CHECK:
Cost: R70 000
Less: Accumulated Depreciation (42 000)
Book Value R28 000
Sold R36 000
Profit on sale R8 000

EXERCISE: 1

General Ledger of ….

DR Motor Vehicles CR
1 July 2006 Balance b/d 70 000 30 June 2007 Asset Disposal 70 000

70 000 70 000

Bank
30 June 2007 Asset Disposal 36 000
VAT Control 5 400

Accumulated Depreciation: Vehicles

30 June 2007 Asset Disposal 42 000 1 July 2006 Balance b/d 35 000
30 June 2007 Depreciation 7 000

42 000 42 000
 Depreciation
30 June 2007 Accumulated Depreciation: 7 000
Vehicles

VAT Control
30 June 2007 Bank 5 400

Asset Disposal
Accumulated Depreciation:
30 June 2007 Motor Vehicles 70 000 30 June 2007 Vehicle 42 000
Profit and Loss Account 8 000 Bank 36 000
(Profit on sale of asset)
78 000 78 000

Profit and Loss Account

30 June 2007 Asset Disposal 8 000