I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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6

   Non-current asset disposals 

When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference 

between the net sale price of the asset and its carrying amount at the time of disposal. 

6.1 The disposal of non-current assets 

Non-current assets are not purchased by a business with the intention of reselling them in the normal 

course of trade. However, they might be sold off at some stage during their life, either when their useful 

life is over or before then. A business might decide to sell off a non-current asset long before its useful 

life has ended. 

Whenever a business sells something, it will make a profit or a loss. When non-current assets are 

disposed of, there will be a profit or loss on disposal. As it is a capital item being sold, the profit or loss 

will be a capital gain or a capital loss. These gains or losses are reported in the income and expenses 

part of the statement of profit or loss of the business, after gross profit. They are commonly referred to 

as 'profit on disposal of non-current assets' or 'loss on disposal'. 

Examination questions on the disposal of non-current assets are likely to ask for ledger accounts to be 

prepared, showing the entries in the accounts to record the disposal. But before we look at the ledger 

accounting for disposing of assets, we had better look at the principles behind calculating the profit (or 

loss) on disposing of assets. 

6.2 The principles behind calculating the profit or loss on disposal 

The profit or loss on the disposal of a non-current asset is the difference between (a) and (b) below. 

(a) 

The carrying amount of the asset at the time of its sale 

(b) 

Its net sale price, which is the price minus any costs of making the sale 

A profit is made when the sale price exceeds the carrying amount, and a loss is made when the sale 

price is less than the carrying amount. 

(IAS 16, para. 71) 

6.3 Example: disposal of a non-current asset 

A business purchased a non-current asset on 1 January 20X1 for $25,000. It had an estimated life of 

six years and an estimated residual value of $7,000. The asset was eventually sold after three years on  

1 January 20X4 to another trader who paid $17,500 for it. 

What was the profit or loss on disposal, assuming that the business uses the straight line method for 

depreciation? 

Solution

 

Annual depreciation  = 

_

$(25,000  

7,000)

6 years

 = $3,000 per annum 

 

 $    

Cost of asset 

 25,000 

Less accumulated depreciation (three years) 

   9,000 

Carrying amount at date of disposal 

 16,000 

Sale price 

 17,500 

Profit on disposal 

   1,500 

This profit will be shown in the statement of profit or loss of the business where it will be an item of 

other income, below gross profit. 

6.4 Example 2: disposal of a non-current asset 

A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an estimated 

residual value of $3,000 and a life of eight years. The machine was sold for $18,600 on 31 December 

20X4, the last day of the accounting year of the business. To make the sale, the business had to incur 

dismantling costs and costs of transporting the machine to the buyer's premises. These amounted to 

$1,200. 

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CHAPTER 8  

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  TANGIBLE NON-CURRENT ASSETS