Question

Can we depreciate assets those are disposed of during the year?

For instance, if one asset is used till October 10 and then sold on that day. Do we have to charge depreciation for the asset till October 10, 2020 since we have used the asset? Why?
 

Answer

Yes, you should depreciate it in line with the selected method, because the depreciation reflects the asset’s consumption and yes, you consumed it from 1 January till 10 October.

I have seen that some companies did not depreciate and simply took the carrying amount from previous period as a basis to calculate profit (loss) from sale of that asset.

This is wrong, because this treatment does not reflect the real consumption of the asset until the moment of its sale.

Let me give you a numerical example:

  • Asset’s carrying amount at 31 December 20X1: CU 10 000
  • Depreciation charged: CU 2 400 per year (that is, CU 200 per month);
  • Asset was sold on 1 October 20X2 for CU 9 500.

So, if you ignore the depreciation for 9 months of 20X2 (1 January – 30 September), then you would show the loss on sale of the asset amounting to CU 500 (revenue from sale of CU 9 500 – carrying amount at 31 December of CU 10 000).

That’s not correct, because it does not reflect the real situation.

Instead, you should recognize the depreciation for 9 months first, that is CU 1 800 (CU 200*9):

  • Debit Profit or loss – depreciation: CU 1 800

  • Credit PPE: CU 1 800

The carrying amount at 30 September goes down to CU 8 200 (CU 10 000 – CU 1 800).

So, you made a profit on sale amounting to CU 1 300 (CU 9 500 being revenue less CU 8 200 being the new carrying amount).

The journal entry is:

  • Debit Cash/bank account: CU 9 500

  • Credit PPE: CU 8 200

  • Credit Profit or loss: CU 1 300