A business has an accounting year end of 30 June. It purchased an item of plant on 1 April 20X5 as follows:
Cost $15000
3 year maintenance agreement $450
Total $15450
At the date of purchase, the item of plant and equipment had an estimated useful life to the business of five years and an estimated residual value of $2,000. This item of plant was traded in for a replacement item on 30 September 20X8 at an agreed valuation of $5,000.
It has been depreciated at 20% per annum on a straight-line basis, with a pro-rated charge in the year of acquisition and disposal.
Calculate the profit or loss on disposal of the item of plant.
$ Profit / loss* * Delete which does not apply
The answer given is 900 loss i understand how they reached the answer but should we not increase by 2000 because of the residual value- should be 2900 loss?
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Depreciation
3y ago#1The residual value has nothing to do with it at the date of replacement.
The depreciation is (15000 - 2000)/60 per month
They will have owned it for 42 months.
Therefore the carrying value at the date of sale is 15,000 - (42/60 x (15,000 - 2000)) = 5,900.
The sale proceeds were 5,000, so there is a loss of 900.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
I dont understand why the residual value has nothing to do with it
If its residual value is 2000 that means it could be sold for 2000 scrap value after using it?
3y ago#3It only means that was the estimate when you bought the machine.
What is actually sold for might be higher or lower and is the actual selling price that is relevant when we account for the disposal.
Again, have you watched our free lectures on this?
Hello John,
Isn't the depreciable part after deducting the residual value (in this case 15000 purchase value less 2000 residual value)?
3y ago#5Yes, and that is what I have written in my previous reply.
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