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”Review profits and losses on disposal of assets in the year to assess reasonableness of the depreciation policies”.
Question:How is the profit/losses on disposal related to depreciation policies?
If there were consistently large profits (say) on disposal, this would imply that the useful life of the asset was longer than implied by the depreciation rate and therefore that the depreciation rate is too high.
Similarly, consistent losses on disposal imply depreciation rate is too low.
Hi Sir, just to make sure that I understood your statement correctly. This would mean that the assets has depreciated more than it should be when the company is constantly having large profit on disposal right?
Yes
Profit/(loss) = Proceeds – (cost – accumulated depreciation)
If you depreciate cars, say, at 10% I.e. over 10 years when 20% would be more suitable, the carrying amount after 4 years – say – would be twice what it should be at the more reasonable rate. Giving consistent losses on the disposal of cars.
Profit/loss on disposal, though a separate a/c in the general ledger, will usually be combined with depreciation expense in the presentation of SoPL.
Profit on disposal = overdepreciation I.e. will reduce depreciation expense in the current year. Loss on disposal = underdepreciation
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