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Disposal of Fixed Assets II. quit. Example 2. EXAMPLE 2: Mr. BUBU bought two delivery van on 1 Jan 2001 for $20,000 each . He charged depreciation on the machines at 20% per annum for each year . On 30 June 2002 , after allowing for the year’s depreciation,

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Example 2

EXAMPLE 2:

Mr. BUBU bought two delivery van on 1 Jan 2001 for

$20,000 each. He charged depreciation on the

machines at 20% per annum for each year. On 30

June 2002, after allowing for the year’s depreciation,

he soldone of the delivery van for $15,000 which he

put into the bank.

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Example 2

  • EXAMPLE 2:
  • BUBU’s financial year ends on 31 December.
  • Prepare the Machinery Account for each of the two years 2001 and 2002.
  • Prepare the Provision for Machinery Depreciation Account for the two years
  • Prepare the Machinery Disposal Account for 2002.
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Time Line I – Previous Example 1

Selling Price

IN

$15,000

Depreciation 20% per annum

I Jan

2001

$4,000

31 Dec

2001

$4,000

31 Dec

2002

OUT

$20,000

Cost Price

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Time Line 2 – Example 2

Selling Price

IN

$15,000

Depreciation 20% per annum

I Jan

2001

$8,000

31 Dec

2001

?

30 Jun

2002

OUT

$20,000

$20,000

Cost Price

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Depreciation

  • Total depreciation in year 2001 = $40,000 x 20%
  • = $ 8,000
  • Total depreciation in year 2002 = $ 6,000
  • Machine A (Bought on 1 Jan 2001)
  • = $20,000 x 20%
  • = $ 4,000
  • Machine B (Dispose off on 30 June 2002)
  • = $20,000 x 20% x ½
  • = $ 2,000
  • Therefore total depreciation = $8,000 + $6,000
  • = $14,000
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Gain/Loss on Disposal

Provision for depreciation

Selling Price = Amount received for the disposal

= $15,000

Net Book Value = Price at - Total accumulated

cost depreciation

= $20,000 - $6,000

= $ 14,000

Gain on disposal = SP – NBV

= $ 15,000 - $ 14,000

= $ 1,000

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Total accumulated depreciation

What is the amount of the provision for depreciation that is

required to be transferred to the vehicle disposal account?

= FULL AMOUNTof the accumulated depreciation on the

DISPOSED ASSETup to the date of sale.

= Year 1 Depreciation + Year 2 Depreciation

= (Cost Price x Rate) + (Cost Price x Rate x Usage)

= ($20,000 x 20%) + ($20,000 x 20% x ½)

= $ 4,000 + $ 2,000

= $ 6,000

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Jan 1

Bank

Dec 31

Balance c/d

40,000

2002

2002

Jan 1

Balance b/d

40,000

Jun 30

Disposal of Machinery

Dec 31

Balance c/d

20,000

40,000

40,000

2003

Jan 1

Balance b/d

20,000

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Example 2

At Cost Price

LEDGER ENTRIES:

Machinery Account

IN (BUY)

OUT (SELL)

$

$

2001

2001

40,000

(2x$20,000)

20,000

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Dec 31

Dec 31

Balance c/d

Balance c/d

8,000

8,000

Dec 31

Depreciation

2002

2002

2002

Dec 31

Disposal of Machinery

Dec 31

Dec 31

Balance b/d

Balance b/d

8,000

8,000

Dec 31

Depreciation

14,000

14,000

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Example 2

LEDGER ENTRIES:

Provision for Depreciation of Machinery Account

2001

$

2001

$

8,000

($40,000x20%)

6,000

6,000

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Jun 30

Machinery

Dec 31

Provision for depreciation

Dec 31

Profit on disposal

Dec 31

Bank

21,000

21,000

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Example 2

LEDGER ENTRIES:

Disposal of Machinery Account

2002

$

2002

$

20,000

6,000

1,000

15,000

Balancing figure