Use the following information to answer this question A fixed asset was bought for #60,000 on 1st January, 1997. Depreciation was provided at 10% on cost. I...
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Use the following information to answer this question
A fixed asset was bought for #60,000 on 1st January, 1997. Depreciation was provided at 10% on cost. It was sold for #16,000 on 30th June, 2001.
The profit or loss sale was
Answer Details
The asset cost \( \text{#}60{,}000 \) and is depreciated at \( 10\% \) of cost per year (straight-line method), so the annual depreciation charge is:
\[ \text{#}60{,}000 \times 10\% = \text{#}6{,}000 \text{ per year} \]The asset was bought on 1 January 1997 and sold on 30 June 2001. Counting the full years 1997, 1998, 1999 and 2000, plus the half year from January to June 2001, gives a total useful life to the point of sale of \( 4.5 \) years.
\[ \text{Accumulated depreciation} = 4.5 \times \text{#}6{,}000 = \text{#}27{,}000 \]| Item | Amount |
|---|---|
| Cost | #60,000 |
| Accumulated depreciation (4.5 years) | #27,000 |
| Net book value at date of sale | #33,000 |
| Sale proceeds | #16,000 |
The net book value at the date of sale is \( \text{#}60{,}000 - \text{#}27{,}000 = \text{#}33{,}000 \). Since the asset was sold for only \( \text{#}16{,}000 \), which is less than its net book value, the difference is a loss on disposal:
\[ \text{Loss on sale} = \text{#}33{,}000 - \text{#}16{,}000 = \text{#}17{,}000 \]A profit would only arise if the sale proceeds exceeded the net book value; here proceeds are well below it, confirming a loss rather than a profit, and the figure of \( \text{#}16{,}000 \) alone is simply the sale proceeds, not the loss.
Examination reminder: always calculate accumulated depreciation for the exact number of years and part-years the asset was actually held before comparing net book value with sale proceeds.
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