VCE Accounting Unit 4

1. 17.5
UNDER-DEPRECIATION
AND LOSS ON DISPOSAL

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
17.5 UNDER-DEPRECIATION AND
LOSS ON DISPOSAL
2015 2016 2017
Cost
$40,000
$9,000 $7,000 $4,000
Carrying
Value
$31,000
Carrying
Value
$24,000
Carrying
Value
$20,000
Sold for
$15,000
here…
$40,000
$0
Carrying value $20,000
Sold for $15,000
Loss on Disposal
$5,000
Under-depreciated by $5,000

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Loss on disposal – where is it recorded in the Income Statement?
Income Statement
Revenue $ $
Sales 100000
less Cost of Goods Sold 25000
Gross Profit 70000
less Other Expenses
Rent 10000
Wages 35000
Loss on disposal on van 5000 50000
Net Profit 20000
17.5 UNDER-DEPRECIATION AND
LOSS ON DISPOSAL
Income Statement
Revenue $ $
Sales 100000
less Cost of Goods Sold 25000
Gross Profit 70000
less Other Expenses
Rent 10000
Wages 35000
Loss on disposal on van 5000 50000
Net Profit 20000
“Loss on disposal”
is recorded in
Other Expenses

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Why is an adjustment needed for a Loss on Disposal?
17.5 UNDER-DEPRECIATION AND
LOSS ON DISPOSAL
$40,000
$0
Carrying value $20,000
What was recorded…
$20,000Total Expenses =
What should’ve been recorded…
$40,000
$0
Sold for $15,000
$25,000Total Expenses =$20,000 $25,000
We haven’t
charged enough
depreciation
Need a $5,000
adjustment to
make it right…
$20,000Loss on Disposal = $5,000

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Why is an adjustment needed for a Loss on Disposal?
17.5 UNDER-DEPRECIATION AND
LOSS ON DISPOSAL
What was recorded…
Total Expenses = $20,000
What should’ve been recorded…
Total Expenses = $25,000
So, if a $5,000 Loss on Disposal was not recorded then:
• Depreciation expense would have been $5,000 too low
• Net Profit would have been overstated by $5,000
$20,000Loss on Disposal = $5,000

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Which Accounting Principles and Qualitative Characteristics
require the Loss on Disposal to be recorded?
 The $5,000 adjustment ensures that:
Reporting Period
Correct Expenses
have been matched
with Revenues
17.5 UNDER-DEPRECIATION AND
LOSS ON DISPOSAL
Relevance
Net Profit is accurate
which facilitates
better decision-
making
Conservatism
• Expenses are not
understated
• Net Profit is not
overstated
What was recorded…
Total
Expenses = $20,000
What should’ve been recorded…
Total
Expenses = $25,000

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ11 X