Disposals of Plant assets

Sale of asset
Step 1. Update depreciation to the date of disposal. This is just to determine the book value and
then any profit or loss if there is.
Step 2. Journalize disposal by
a. Recording cash received (debit) or paid (credit).
b. Remove accumulated depreciation (debit).
c. Remove the asset cost (credit).
d. Record either a gain or loss so in this case we debit a loss or credit a gain.

The rule to determine the gain or the loss will be as follows:

If cash > book value, Record a gain (credit)

If cash < book value, Record a loss (debit)

If cash =book value, no gain or loss

Illustration example;

By discarding plant asset

A machine costing birr 9,000.00, with accumulated depreciation of birr 9,000.00 on Sene 30 of
the previous year was discarded 5th of Sene of current year.

The company is depreciating the machine using the straight line method over eight years with
zero salvage value.

Entry will be

Accumulated depreciation birr 9,000.00

Cost of machine 9,000.00

In this case there is no any cash received and any loss/gain, we may incur some nominal costs up
on disposal will record that in a separate account. So that the account accumulated depreciation
and asset (machine) account becomes zero.

Equipment costing birr 8,000.00 with accumulated depreciation of birr 6000.00 on Sene 30 of
previous year, was discarded on the 7 th year of six month in that year.

The company is using straight line depreciation over eight years with zero salvage value.

Step 1 determine the book value of the machine as of 7 th year of six month

Straight line method 8,000.008=1,000.00

Half year will be 500.00

Total accumulated depreciation 6,000+500.00=6,500.00 after a half year depreciation

recorded (posted)

Depreciation expense 500.00

Accumulated depreciation 500.00

Now the book value of the machine becomes 8,000.00-6,500=1,500.00

I didn’t receive any money therefore I am at loss of 1500.00, so that the entry will be as follows;

Accumulated depreciation 6,500.00

Loss on disposal of Machine 1,500.00

Machine 8,000.00

To discard machine with birr 1,500.00 book value

In exchange with new machine.

Fana trading plc, trade in an old machine with a new machine. The cost of new machine is birr
10,000.00. The cost of the old machine is birr 8,000.00 and accumulated depreciation until the
disposal amount to 3,000.00. Trade-in value for the old machine is birr 4,000.00

Book value 8,000.00-3,000.00=5,000.00

Book value birr 5,000.00

Less trade in value (4,000.00)

Loss 1000.00

Cash paid for the new machine= Cost (new asset) - Trade-in value

= 10,000.00-4,000.00

= 6,000.00

Journal:

Machine (New) 10,000.00

Accumulated depreciation (Old) 3,000.00

Loss on disposal 1,000.00

Machine (Old) 8,000.00

Cash 6,000.00

By Sales

Fana trading plc the cost of machine is birr 10,000.00. Accumulated depreciation until the
disposal date is amount birr3,000.00. Trade-in value for the machine is birr 8,000.00

Book value 10,000.00-3,000.00=7,000.00

Less trade in value (8,000.00)

Gain on disposal 1000.00

Cash 8,000.00

Accumulated Depreciation 3000.00

Cost of the machine 10,000.00

Gain on disposal 1,000.00