Question

"An asset is purchased on 1 Jan 20X4 for £90,000 and is depreciated on a reducing balance basis at 15% per annum. The asset is sold on the 1 Jan 20X7 for £45,000.

What is the profit/loss on disposal?"

Answer 1

To calculate the loss on asset disposal, we find the asset's carrying value after depreciation for three years and compare it to the sale price. The carrying value at the end of Year 3 is £55,271.25. After selling for £45,000, there is a loss of £10,271.25.

Step-by-step explanation:

To calculate the profit or loss on the disposal of an asset, we need to compare the sale price with the asset's carrying value (net book value) at the time of sale. The carrying value is the original cost less accumulated depreciation. Since this is a reducing balance method at 15% per annum, the calculation will involve depreciating the asset's value by 15% each year for three years.

Year 1 Depreciation: £90,000 x 15% = £13,500

Carrying Value at end of Year 1: £90,000 - £13,500 = £76,500

Year 2 Depreciation: £76,500 x 15% = £11,475

Carrying Value at end of Year 2: £76,500 - £11,475 = £65,025

Year 3 Depreciation: £65,025 x 15% = £9,753.75

Carrying Value at end of Year 3: £65,025 - £9,753.75 = £55,271.25

Since the asset is sold for £45,000, the loss on disposal will be the carrying value at the time of sale minus the sale price:

Loss on Disposal: £55,271.25 - £45,000 = £10,271.25

The loss on the disposal of the asset is £10,271.25.