DISPOSAL OF FIXED ASSETS

SECOND TERM SCHEME OF WORK FOR SS 2 FINANCIAL ACCOUNTING LESSON NOTE

SCHEME OF WORK WITH WEEKLY LESSON NOTES FOR SS 2 SECOND TERM FINANCIAL ACCOUNTING

SUBJECT :

FINANCIAL ACCOUNTING

CLASS :

SS 2

TOPIC :

DISPOSAL OF FIXED ASSETS

Objective: At the end of this lesson, students should be able to understand the meaning and definition of disposal of fixed assets and the two methods of recording the disposal of fixed assets.

Materials Needed:

• Whiteboard and markers
• Handouts on the topic
• Example problems on the old and new methods of disposal of fixed assets

WEEK  :

WEEK 12

PREVIOUS LESSON :

CAPITAL AND REVENUE EXPENDITURE

CONTENT

CONTENT 

• Meaning and definition of disposal of fixed asset
• Methods of disposal of fixed assets and their format.
• Practical illustration.

Today we will be discussing the meaning and definition of the disposal of fixed assets.

Fixed assets are long-term assets that are used in the business operations to generate revenue. These assets include land, buildings, machinery, equipment, vehicles, and furniture.

Sometimes, businesses need to sell their fixed assets due to various reasons such as upgrading to newer equipment, downsizing, or liquidation of the business. This process is called disposal of fixed assets.

When a fixed asset is sold, it is recorded in the Assets Disposal Account. This account is used to track the profit or loss made on the sale of the fixed asset.

Let’s take an example of a company that is selling a delivery truck that they no longer need. The truck was purchased for ₦50,000 five years ago and it has been depreciated by ₦30,000 over the years. The company sells the truck for ₦25,000.

To record this transaction, the company would follow these accounting procedures:

1. Debit the Cash account for ₦25,000 (since this is the amount they received from the sale)
2. Credit the Delivery Truck account for ₦20,000 (the original cost of the truck minus the accumulated depreciation)
3. Credit the Accumulated Depreciation account for ₦30,000 (the total depreciation taken on the asset over the years)
4. Debit the Profit and Loss account for ₦5,000 (the difference between the amount received from the sale and the net book value of the asset)

This transaction shows that the company made a loss of ₦5,000 on the sale of the delivery truck.

In conclusion, the disposal of fixed assets refers to the process of selling a long-term asset in a business. The sale is recorded in the Assets Disposal Account to show the profit or loss made on the sale of the fixed asset. It is important for businesses to follow the proper accounting procedures when disposing of fixed assets to ensure accurate financial reporting

Evaluation

1. What is the definition of disposal of fixed assets? A. The process of purchasing new assets for a business B. The process of selling long-term assets in a business C. The process of leasing assets to other businesses D. The process of repairing damaged assets in a business
2. Why might a business need to dispose of fixed assets? A. To increase the value of the business B. To reduce liabilities C. To upgrade to newer equipment D. To hire more employees
3. How is the sale of fixed assets recorded in the accounting system? A. In the Cash account B. In the Fixed Assets account C. In the Sales account D. In the Assets Disposal Account
4. What is the purpose of the Assets Disposal Account? A. To track the depreciation of fixed assets B. To track the purchase of new assets C. To track the sale of fixed assets D. To track the maintenance of fixed assets
5. What is the difference between the sale price and the net book value of a fixed asset called? A. Profit B. Loss C. Revenue D. Cost of goods sold
6. What is the proper accounting procedure for the sale of a fixed asset? A. Debit the Fixed Asset account and credit the Sales account B. Debit the Cash account and credit the Fixed Asset account C. Debit the Accumulated Depreciation account and credit the Fixed Asset account D. Debit the Profit and Loss account and credit the Fixed Asset account
7. How is the profit or loss made on the sale of a fixed asset calculated? A. By subtracting the original cost of the asset from the sale price B. By subtracting the accumulated depreciation from the sale price C. By subtracting the net book value of the asset from the sale price D. By adding the original cost of the asset to the sale price
8. What is the significance of following proper accounting procedures when disposing of fixed assets? A. To ensure accurate financial reporting B. To increase the value of the business C. To reduce the tax liability of the business D. To simplify the accounting process
9. Which of the following is not an example of a fixed asset? A. Land B. Buildings C. Inventory D. Vehicles
10. How might a business benefit from disposing of fixed assets? A. By increasing the value of the business B. By reducing liabilities C. By generating revenue from the sale D. By hiring more employees

METHOD OF DISPOSAL OF FIXED ASSET
There are two methods of recording disposal of fixed asset. They are the old and new methods of depreciation, on the asset sold

The old method:

Which depreciation has been credited to the asset account and the asset is disposed, then:
a. For sale of asset:
i. Debit cash book
ii. Credit asset account
b. If there is profit on sale:
i. Debit asset account
ii. Credit profit and loss account
c. If here is loss on sale:
i. Debit profit & loss account
ii. Credit asset account.
Example
DR Asset account CR
N N
19xx Bal b/d x 19xx Cash book x
Profit x
xx xx

DR Cash book CR
N N
19xx Asset x

DR Profit & Loss Account CR
N N
19xx Loss on sale of asset x Profit on sale of asset x

New method:

Under the new method, the depreciation is not charged to the asset account. Instead, a provision for depreciation account is opened in the name of each asset. When the asset is sold, the following entries are passed:

a. For sale of asset: i. Debit cash book ii. Credit provision for depreciation account iii. Credit asset account b. If there is profit on sale: i. Debit provision for depreciation account ii. Credit profit and loss account c. If here is loss on sale: i. Debit profit & loss account ii. Credit provision for depreciation account.

Example: DR Provision for Depreciation Account CR N N 19xx Bal b/d x 19xx Cash book x Depreciation x

DR Cash book CR N N 19xx Asset x

DR Profit & Loss Account CR N N 19xx Loss on sale of asset x Profit on sale of asset x

The disposal of fixed assets can be recorded using either the old or new method of depreciation. Both methods involve debiting the cash book when the asset is sold and crediting either the asset account (old method) or the provision for depreciation account (new method). The entries for profit or loss on the sale of the asset differ between the two methods

Evaluation

1. What are the two methods of recording disposal of fixed assets? A. The cash method and the accrual method B. The old method and the new method of depreciation C. The straight-line method and the double-declining balance method D. The FIFO method and the LIFO method
2. Under which method of depreciation is the depreciation charged to the asset account? A. Old method B. New method C. Both old and new methods D. None of the above
3. Under the old method of depreciation, which account is credited when the asset is sold? A. Cash book B. Provision for Depreciation Account C. Asset account D. Profit and Loss Account
4. Under the new method of depreciation, which account is credited when the asset is sold? A. Cash book B. Provision for Depreciation Account C. Asset account D. Profit and Loss Account
5. Which method of disposal of fixed assets involves opening a provision for depreciation account in the name of each asset? A. Old method B. New method C. Both old and new methods D. None of the above
6. In the old method of depreciation, what is the entry for a profit on the sale of an asset? A. Debit asset account and credit profit and loss account B. Debit profit and loss account and credit asset account C. Debit cash book and credit profit and loss account D. Debit profit and loss account and credit cash book
7. In the new method of depreciation, what is the entry for a loss on the sale of an asset? A. Debit provision for depreciation account and credit cash book B. Debit profit and loss account and credit provision for depreciation account C. Debit cash book and credit provision for depreciation account D. Debit provision for depreciation account and credit asset account
8. Which method of disposal of fixed assets involves charging the depreciation to a provision for depreciation account? A. Old method B. New method C. Both old and new methods D. None of the above
9. What is the purpose of the provision for depreciation account? A. To track the sale of fixed assets B. To track the profit or loss made on the sale of fixed assets C. To track the accumulated depreciation of fixed assets D. To track the purchase of new fixed assets
10. Which method of disposal of fixed assets is considered more accurate for financial reporting purposes? A. Old method B. New method C. Both old and new methods D. It depends on the nature of the business

Worked Examples

Old Method:

Let’s say a company is disposing of a motor vehicle that was purchased for ₦100,000 five years ago and has been depreciated by ₦60,000 over the years. The company sells the vehicle for ₦35,000.

To record this transaction using the old method, the following accounting entries will be made:

1. For sale of asset: Debit Cash account for ₦35,000 Credit Motor Vehicle account for ₦40,000 (original cost of the vehicle minus the accumulated depreciation)
2. If there is profit on sale: Debit Motor Vehicle account for ₦20,000 (difference between the sale price and the net book value) Credit Profit and Loss account for ₦20,000
3. If there is loss on sale: Debit Profit and Loss account for ₦5,000 (difference between the net book value and the sale price) Credit Motor Vehicle account for ₦5,000

New Method:

Under the new method, a provision for depreciation account is opened in the name of each asset. When the motor vehicle is sold, the following accounting entries will be made:

1. For sale of asset: Debit Cash account for ₦35,000 Credit Provision for Depreciation account for ₦60,000 Credit Motor Vehicle account for ₦40,000 (original cost of the vehicle)
2. If there is profit on sale: Debit Provision for Depreciation account for ₦25,000 (difference between the sale price and the provision for depreciation balance) Credit Profit and Loss account for ₦25,000
3. If there is loss on sale: Debit Profit and Loss account for ₦10,000 (difference between the provision for depreciation balance and the sale price) Credit Provision for Depreciation account for ₦10,000

Note: The provision for depreciation balance is calculated as the original cost of the asset minus the total depreciation taken on the asset over the years.

Both the old and new methods of disposal of fixed assets can be used for accurate financial reporting. The choice of method will depend on the specific needs of the business

Lesson Presentation

Procedure:

I. Introduction (5 minutes)

• Greet the students and introduce the topic of disposal of fixed assets.
• Ask if anyone has heard of this topic before and if they can define it briefly.

II. Definition of Disposal of Fixed Assets (10 minutes)

• Define disposal of fixed assets as the process of selling a long-term asset in a business.
• Give examples of fixed assets such as land, buildings, machinery, equipment, vehicles, and furniture.
• Explain that the sale of fixed assets is recorded in an account called the Assets Disposal Account

III. Old Method of Depreciation (15 minutes)

• Explain the old method of depreciation where the depreciation is charged to the asset account.
• Show an example of a motor vehicle sold under the old method and explain the accounting entries made for the sale, profit, and loss on the sale.

IV. New Method of Depreciation (15 minutes)

• Explain the new method of depreciation where the depreciation is not charged to the asset account but a provision for depreciation account is opened in the name of each asset.
• Show an example of a motor vehicle sold under the new method and explain the accounting entries made for the sale, profit, and loss on the sale.

V. Advantages and Disadvantages (10 minutes)

• Discuss the advantages and disadvantages of both methods of depreciation.
• Ask students which method they prefer and why.

VI. Conclusion (5 minutes)

• Summarize the key points of the lesson.
• Ask students if they have any questions or need clarification on any part of the lesson.

Assessment:

• Hand out example problems on the old and new methods of disposal of fixed assets and ask students to solve them.
• Grade the problems and provide feedback to the students.

Homework:

• Assign a research project on the different methods of depreciation used in accounting and their advantages and disadvantages.

Note: This lesson plan can be adjusted for time and content to fit the needs of the class

Weekly Assessment /Test

1. What are fixed assets, and why are they important in business operations?
2. What is the definition of disposal of fixed assets?
3. What is the purpose of the Assets Disposal Account?
4. What are the two methods of recording disposal of fixed assets?
5. Under which method of depreciation is the depreciation charged to the asset account?
6. What is the difference between the old and new methods of depreciation?
7. What is the proper accounting procedure for the sale of a fixed asset under the old method?
8. What is the proper accounting procedure for the sale of a fixed asset under the new method?
9. How is the profit or loss made on the sale of a fixed asset calculated under the old method?
10. How is the provision for depreciation account used in the new method of disposal of fixed assets