Non-Current Assets, Depreciation and Disposal
What the domain tests
You must classify capital and revenue expenditure, calculate depreciation under different methods, record disposals and part-exchange, and present non-current assets at net book value. Disposal account questions are common.
Core rules
Capital expenditure acquires or improves a non-current asset and is capitalised: purchase price, import duties, delivery, installation and testing, less trade discount. Revenue expenditure covers repairs, maintenance, insurance and running costs and is expensed.
Depreciation allocates the depreciable amount over useful life. Methods:
- Straight line: (cost − residual value) ÷ useful life, or a fixed percentage of cost.
- Reducing balance: a fixed percentage of the opening net book value each year.
- Units of production: depreciable amount × units used in the period ÷ total expected units.
On disposal, remove the asset cost and accumulated depreciation, record proceeds, and transfer the balance to profit and loss. Profit or loss on disposal = proceeds − net book value at disposal. Part-exchange proceeds equal the part-exchange allowance plus any cash paid.
Worked example
A machine costs 5,000,000 FCFA, has a residual value of 500,000 and a five-year life. Straight-line depreciation is (5,000,000 − 500,000) ÷ 5 = 900,000 per year. After three years, accumulated depreciation is 2,700,000 and net book value is 2,300,000. It is sold for 2,000,000.
- Dr Disposal 5,000,000; Cr Machine 5,000,000.
- Dr Accumulated depreciation 2,700,000; Cr Disposal 2,700,000.
- Dr Bank 2,000,000; Cr Disposal 2,000,000.
- Disposal account shows a debit balance of 300,000, so Dr Profit and loss 300,000; Cr Disposal 300,000. This is a loss on disposal.
Traps
Profit on disposal is proceeds minus net book value, not minus cost. Installation and delivery are capitalised, but repairs are expensed. Reducing-balance depreciation is calculated on the opening net book value, not on cost every year. Accumulated depreciation has a credit balance and is not an asset. Do not forget depreciation for the current year before calculating the disposal profit or loss.