FA – May 2023 – L1 – SA – Q10 – Depreciation Methods and Accounting for Disposals

Calculating profit or loss on the disposal of equipment after accounting for depreciation.

Question

Shark and Co. purchased a piece of equipment for N960,000 on September 1, 2016. Depreciation was charged at 12.5% per annum on a straight-line with zero residual value. Depreciation is charged from acquisition date to disposal date. The equipment was sold for N315,000 on June 30, 2022. Calculate the profit or loss on disposal.

A. N45,000 Gain

B. N45,000 Loss

C. N50,000 Gain

D. N55,000 Gain

E. N55,000 Loss

Answer

Explanation:
To calculate the profit or loss on disposal, we first need to determine the total depreciation and the carrying amount of the equipment at the time of disposal.

Depreciation per annum: 12.5% of N960,000 = N120,000
Total depreciation from September 1, 2016, to June 30, 2022:
Depreciation period is 5 years and 10 months.
Annual depreciation for 5 years = 5 x N120,000 = N600,000
For 10 months = (10/12) x N120,000 = N100,000
Total depreciation = N600,000 + N100,000 = N700,000
Carrying amount on June 30, 2022:
Cost of equipment – Total depreciation = N960,000 – N700,000 = N260,000
Profit on disposal:
Sale price – Carrying amount = N315,000 – N260,000 = N55,000 (Gain)

Hence, the profit on disposal is a gain of N55,000.

Tags: Depreciation, Disposal of assets, Gain or Loss on Disposal
Level: Level 1

Topic: Depreciation Methods and Accounting for Disposals
Series: MAY 2023

Uploader: Theophilus