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Lecture # 04

R1 BY NAVEED ANSARI

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18 views7 pages

Lecture # 04

R1 BY NAVEED ANSARI

Uploaded by

aleeshashiekhcr7
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter # 01

Property, Plant and Equipment

IAS-16
Disposal through Exchange

Example # 42 Page # 31:


Naveed & Co had purchased two machines costing Rs. 40,000 (Rs. 20,000 each) on
01.07.19.
• Method is Straight-line.
• Rate is 10%.
• On 1st April 2021, Naveed & Co exchange a machine with Ali & Co.
• Cost of new machine was Rs. 36,000. Cash paid was Rs. 28,000.
Required: Prepare Machine a/c, Accumulated Depreciation a/c & Disposal a/c in the
books of Naveed & Co.
Exchange by WDV
Self-made Example:
Ahmad enterprises has a building with an opening balance of Rs. 20,000 along with
accumulated depreciation of Rs. 10,000 on 01.01.19.
• On 01.08.20, Ahmad has purchased a new building costing Rs. 16,000 through cash.
• On 01.10.21, Ahmad has exchanged a building costing Rs. 4,000 which had been
purchased on 01.08.20 with a building from Iqbal enterprises.
• Cost of new building is Rs. 90,000 and Ahmad paid Rs. 40,000 to settle the transaction.
• Depreciation method is WDV.
• Rate is 10%.
Required: Prepare all the relevant accounts for Year ended 2019, 2020 & 2021.
Formulae related to Exchange
Cash paid = Cost of the new asset – Trade in allowance value
Trade in allowance value = Cost of the new asset – Cash paid
Cost of the new asset = Cash paid + Trade in allowance value
Accounting entry of Disposal
Machine (new asset) xxx
Accumulated Depreciation (old asset) xxx
Loss on Disposal xxx
Machine (old asset) xxx
Cash xxx
Gain on Disposal xxx
Gain/Loss on Disposal

Gain/Loss = Trade in allowance value – WDV


Gain/Loss = (Cost of new asset – Cash paid) – (Cost – Acc. Depreciation)
Note:
1. Sometimes cash paid to settle the transaction will not be given in the question
rather you will be provided with trade-in-allowance. Trade-in-allowance is the value
assigned by the shopkeeper to our old asset. In such case cash paid can be
calculated through following equation:
Cash paid = Cost of new asset – Trade in allowance

2. Gain/ (loss) on exchange of asset can be calculated through shortcut way as


follows:
Gain/ (loss) = Trade in allowance – Book value of asset disposed off
Cost of exchanged asset in certain circumstances
Cost of new asset to be debited
Scenario
in exchange entry
Only fair value of new asset is given Fair value of new asset
Fair value of new asset is not given but fair value of Fair value of old asset + cash paid
old asset is given Fair value of old asset − cash received
Fair value of old assets and fair value of new assets Fair value of old asset + cash paid
both are known Fair value of old asset − cash received
Fair value of both new asset and old asset is not Book value of old asset + cash paid
given/ Transaction lack commercial substance Book value of old asset − cash received

Transaction lack commercial substance means that future cash flows from new
asset change minimally.
Example # 50 Page # 37:
Mr. Umair has exchanged an asset with a new one. The cost of old asset and its
accumulated depreciation on date of disposal is Rs.40,000 and Rs.13,000 respectively.
Cash paid to settle the transactions was Rs.18,000.
Required:
Pass journal entries under 3 independent scenarios.
(1) Fair market value of new asset is Rs. 50,000.
(2) Fair market value of new asset is not known and fair market value of old asset is
Rs. 25,000.
(3) Fair market value of old and new asset is not known.

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