Disposal of Fixed Assets

Bank A/c / Cash A/c                      Dr              600000/-

To Machinery A/c                            Cr                                300000/-

To Profit on sale of Machinery                                         300000/-

There is no depreciation will arise as you have sold this machinery on 01/04/2010, otherwise you have to book too.

but sir, what about the one lakh (6 lakhs - 5 lakhs) which is received over and above the Cost of Capital Asset ?

Will it to be credited to P & L A/c. or Capital Reserve ?

In my view, it is to be credited to Capital Reserve as one lakh (6 lakh - 5 lakh) is a Capital Receipt ?

Regards

ravi.

It is to be credited to P&L account.. It might be the capital receipt but we dont segregate it as Capital reserve....I think question of  capital reserve doesnt arise here in this situation...

The entry said by Harpreet sir is correct...

Thanks & Regards,

A.Jayasri..

Hi, my observation is as under:

No doubt the surplus on sale of fixed asset is a capital profit and deserves to be treated as capital reserve. However provisions in AS-5 seem to suggest the profit/loss on asset disposal should be routed through p & l account, though disclosure has to be made. SImilarly provisions contained in AS-6 and AS-10 convey the same.

Capital reserve is also defined under part III of schedule VI of companies act as an amount which cannot be used for distribution of dividends. Therefore interpretation would be that only share premium, CRR, DRR and profits on reissue of forfieted shares are not available for dividends. Therefore capital profits representing surpluses realised on sale of assets are capable of being distributed as dividends. Thus profit on sale of assets may not form part of capital reserves. 

Sources:

Accounting Standards

Auditing Study Material PCC- Page 6.11

Companies Act (bare act)