Profit or Loss on a Sale of a Non-Current Asset (Cambridge International AS Accounting)

Spec point — how to calculate profit or loss on disposal of a non-current asset

Profit or loss on a sale of a non-current asset

Can a business sell a non-current asset?

• A non-current asset can be sold when the business no longer needs it

  • This is referred to as the disposal of a non-current asset

• The sale of the non-current asset could be a cash sale or credit sale

  • If it is a credit sale then a general ledger account is created for the person or business buying the asset
  • This account is referred to as an other receivables account to avoid confusion with trade receivables accounts

• The money received from the sale is called the proceeds of the sale

  • This is a capital receipt

• A non-current asset can also be used as a part-exchange for a new non-current asset

  • The business and the supplier of the new asset will agree on the value of the old asset
  • The business will give the old asset to the supplier
  • The supplier will reduce the cost of the new asset by the value of the old asset

Exam Hint Do not include the sale of a non-current asset in the sales account! The sales account is just for the sale of goods. The sale of a non-current asset will be detailed in a disposal account.

How do I calculate the profit or loss on a sale of a non-current asset?

• STEP 1 Calculate the net book value of the non-current asset

  • The cost of the asset minus the accumulated depreciation

• STEP 2 Calculate the difference between the proceeds of the sale and the net book value

• STEP 3 Determine if a profit or loss has been made

  • If the proceeds of the sale are greater than the net book value then it is a profit

    • This means too much depreciation has been charged

  • If the proceeds of the sale are smaller than the net book value then it is a loss

    • This means not enough depreciation has been charged

Exam Hint Check whether the question says there is a depreciation charge for the non-current asset in the year of sale. If there is, then calculate that year’s depreciation and include it in the provision for depreciation account before working out the net book value.

Worked Example Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges depreciation at 20% per annum using the straight-line method.

Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in the year the equipment is purchased and none in the year it is sold.

Calculate the gain or loss on disposal of the equipment.

Answer:

STEP 1 - Calculate the net book value

• Calculate the annual depreciation charge

20% × $30 000 = $6 000

• Calculate the total provision for depreciation

  • Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023
  • No depreciation is charged in the year of sale

3 × $6 000 = $18 000

• Calculate the net book value

$30 000 - $18 000 = $12 000

STEP 2 - Calculate the profit or loss

• Calculate the difference between the sale proceeds and the net book value

$13 000 - $12 000 = $1 000

STEP 3 - Identify whether it is a profit or loss

• The sale proceeds are higher than the net book value therefore it is a profit

Final answer: Profit of $1 000