VCE Accounting Unit 4

1. 17.4
PROFIT OR LOSS ON
DISPOSAL OF AN ASSET

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Non-current assets need to be depreciated using either:
 Straight-line depreciation
 Reducing balance depreciation
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
ResidualCost 
Useful Life
Reducing Balance %=
Carrying Value
at end of period
Reducing Balance
Depreciation Expense x
Straight-Line
Depreciation Expense =

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 To calculate depreciation, the firm makes estimates on:
 Straight-line depreciation
 Residual value: how much the asset will be sold or traded
for at the end of its useful life
 Useful life: the number of years the asset will be
controlled and used by the firm
 Reducing balance depreciation
 Depreciation %: this figure is an arbitrary guess. E.g. why
20% and not 25%?
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
 There is a conflict between relevance and reliability
Relevant:
• Depreciation is relevant as
it represents the expense
(amount used) of the asset
this period in order to
generate revenue
• This enables an accurate
profit to be determined
• This assists the decision-
making of the business
Depreciation is…
Reliable:
• Depreciation is not reliable
because it involves
estimates to be made of:
• Residual value
• Useful life
• Reducing balance %
• These are guesses which
can’t be verified with a
source document
Depreciation is NOT…

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Because residual value, useful life and reducing-balance % are
estimates, it is common that these will not prove to be correct
 E.g. after 3 years, an asset which cost $10,000 has a carrying
value of $4,000…
 Asset is sold for $2,000…
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
$10,000
$0
$4,000Carrying value
$2,000Sold for
• This Asset has not been depreciated
enough
• This is called under-depreciation
• Valued at $4,000
• Sold for $2,000
• There will be a $2,000 loss

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 E.g. after 3 years, an asset which cost of $5,000 has a carrying
value of $2,000…
 Asset is sold for $3,000…
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
$5,000
$0
$2,000Carrying value
$3,000Sold for• This Asset has been depreciated too much
• This is called over-depreciation
• Valued at $2,000
• Sold for $3,000
• There will be a $1,000 profit

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Under-depreciation (loss) and over-depreciation (profit) on disposal
occur because:
Carrying Value at
time of sale ≠ Sale/Trade-in
Amount
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
$10,000
$0
$4,000Carrying value
$2,000Sold for
Under-
depreciation
(Loss)
Over-
depreciation
(Profit)
$5,000
$0
$2,000Carrying value
$3,000Sold for

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET
Under-
depreciation
What is it? Caused by… Leads to…
When a Non-
Current Asset is
not depreciated
enough
An over-estimation of
either:
• Useful life
• Residual value
• Reducing balance %
EXPENSE
A loss on disposal
of the Non-Current
Asset
Over-
depreciation
When a Non-
Current Asset is
depreciated too
much
An under-estimation of
either:
• Useful life
• Residual value
• Reducing balance %
REVENUE
A profit on disposal
of the Non-Current
Asset

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Reasons why estimates about residual value, useful life and reducing
balance % could be wrong?
The time period for which the asset is used may be longer or shorter than
the original estimated useful life
The asset has been damaged or severely marked which affects how much
the asset can be disposed for
The asset is no longer popular and there is now not much demand in the
second-hand market, e.g. wrong style or colour
The asset has become obsolete or out-dated and can’t be sold or traded
for as much as was originally estimated, e.g. desktop computers, old
iPhones
17.4 PROFIT OR LOSS ON
DISPOSAL OF AN ASSET

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ5 X
SQ6 X