Thursday, September 08, 2011

Can we sell fixed asset and recognize the sale as revenue?

A recent engagement sparked my curiosity to find out whether a sale of fixed asset can be recognized as revenue.

I sort of achieved what I was looking for from this article. Refer Figure 1.

Figure 1
A motor dealer is in the business of selling new and used vehicles. It has a fleet of demonstration vehicles which it allows customers to test drive before they decide to purchase. The dealer adopts a policy of using the demonstration vehicles for one year and then selling the vehicles on. The question is does the sale of one of the used vehicles constitute revenue or is it a fixed asset disposal?

As the motor dealer is in the business of selling new and used vehicles then the sale of one of the demonstration vehicles would constitute turnover.

Now, I'm curious of what will be the accounting treatment for the above. Do I record the sale amount as turnover and the net book value of the vehicle as cost of goods sold?

“Never call an accountant a credit to his profession; a good accountant is a debit to his profession.” - Sir Charles Lyell

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