Disposal of a NCA involving Part exchange allowance

• The disposal of a non-current asset can sometimes generate a part exchange allowance, for example, a sole trader uses a van within their business and decides to trade in their existing van and purchase a new one. This would mean recording the disposal of an existing vehicle and the acquisition of a new vehicle at the same time. 
• 4 MAIN LEDGER ACCOUNTS

  asset at cost account

  accumulated depreciation

  bank

  disposal
• ASSET AT COST ACCOUNT


  This account records the purchase price of the non-current asset and any costs to bring the asset to its location and working condition. 
• accumulated depreciation


  This account shows the total depreciation which has been charged against the non-current asset to the date of the financial statements.

  This account reduces the original cost of the non-current asset. 
• bank


  This account shows all transactions which will increase or reduce the bank account, so when dealing with a part exchange the balance paid for a new non-current asset would be recorded as a credit in the bank account. 
• disposal


  This account is used to record the removal of the non-current assets from the accounts. All values associated with the non-current asset are transferred into this account. The asset at cost and accumulated depreciation accounts are both transferred into the disposal account, along with any proceeds or part exchange allowance towards a new non-current asset.  

  It’s also used to record any profit or loss made when the non-current asset has been disposed. The profit or loss is transferred to the statement of profit or loss at the end of the period.  
• STEP 1

  Remove the cost of the old asset and take to the disposals account.
• STEP 2

  Remove the accumulated depreciation on the old asset and take to the disposals account.
• STEP 3

  Make entries for the proceeds – this is the part-exchange allowance and is often overlooked by students, especially in the asset account.
• STEP 4

  Calculate the gain or loss on disposal and take to the statement of profit or loss.
• STEP 5

  Make an entry for the purchase transaction. Note that if the asset is purchased on credit, the double entry would be with payables rather than bank.