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A business trades in an asset that cost $30,000 two years ago for a new asset that costs $60,000. A cheque for $41,000 was also handed over in full settlement. Assets are depreciated on the straight line basis over five years. What is the gain or loss on disposal?
Help please…I don’t know how to do
When we trade in an asset it as though we are effectively selling it to the company from which we are buying the new asset. Instead of us giving us the cash for the asset they subtract it from the amount we have to pay for the new one.
Here, then new one cost $60,000 but since we only had to pay cash of $41,000 it means they were effectively buying the old one from us for the difference of $19,000.
Do to answer your question, depreciate our asset (which cost $30,00) for two years. the profit or loss on sale is then the difference between the net book value (carrying value) and the sale proceeds of $19,000.
If you are unsure about the depreciation then do watch my free lectures on it. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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