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EMMANUEL says

question 4.

1 jan 2000 krin bought a machine 70000. estimated useful life 7 years. and a residual of 7000. two years later the useful life was revised to three remaining years and at 31 december 2003 machine was sold for 30000.

what was the profit on disposal?

how do you go about this one?

John Moffat says

Initially, the annual depreciation was (70000 – 7000) / 7 = 9,000 a year.

So the value after 2 years (i.e. the end of 2001) will have been 70,000 – (2 x 9000) = 52,000.

The remaining life is revised to 3 years (and the residual value is still 7000 because we are not told different). So the new depreciation will be (52000 – 7000) / 3 = 15,000 a year.

So….at the end of 2003 (which is 2 more years) the value will be 52000 – (2 x 15000) = 22000.

It was sold for 30000, and so there is a profit on sale of 30000 – 22000 = 8000.

femi says

Absolutely! This method is a lot easier. Thank you sir

femi says

Kindly shed for more light on the answer for this question sir,

The plant and machinery acc at cost of a business for the yr ended 31 Dec 2008 is as follows,

Jan 1 balance. 240000

31 March transfer disposal acc 80000

30 June ,cash purchase of plant 160000

31 Dec balance,340000

Depreciation – 20% per annum on straight line basis with proportionate depreciation in the years of purchase and disposal

John Moffat says

You have copied the question wrong – the disposal is 60,000 (not 80,000)

You can get the answer is several ways. If you don’t understand the answer at the back of the lecture notes, then maybe you will find this way easier:

The cost is 240,000 from 1 Jan to 31 March, 3 months. So the depreciation is 3/12 x 20% x 240,000 = 12,000

Then it falls to 180,000 (240,000 – 60,000) and stays at this from 1 Apr to 30 Jun, 3 months, So the depreciation is 3/12 x 20% x 180,000 = 9,000.

Then it increases to 340,000 (180,000 + 160,000) and stays at this from 1 Jul to 31 Dec, 6 months. So the depreciation is 6/12 x 20% x 340,000 = 34,000

So the total depreciation is 12,000 + 9,000 + 34,000 = 55,000

EMMANUEL says

thank u

John Moffat says

You are welcome

stormandsilence says

sir, i did not understand why you subtracted 240000- 60000 please explain

John Moffat says

Because there are disposals of 60.000

persaud says

so sir if we had a gain

John Moffat says

If the ‘missing figure’ on the disposal account is on the other side then there is a profit on sale instead of a loss.

This appears in the Statement of profit or loss as a negative cost and therefore increases the profit instead of decreases it.