Accounting: The Language of Business (Part 62)

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Companies figured out that the easiest way to make money was to reissue records that the accounting department had paid for years ago and already made a profit.

Chris Cornell

 Fixed Assets and Intangible Assets (Part F)

by

Charles Lamson

Disposal of Fixed Assets

Fixed assets that are no longer useful may be discarded, sold, or traded for other fixed assets. The details of the entry to record a disposal will vary. In all cases however, the book value of the asset must be removed from the accounts. The entry for this purpose debits the asset's and accumulated depreciation account for the balance on the date of disposal and credits the asset account for the cost of the asset. 

A fixed asset should not be removed from the accounts only because it has been fully depreciated. If the asset is still used by the business period, the cost in emulated depreciation should remain in the ledger this period. This maintains accountability for the asset in the ledger if the book value of the asset was removed from the ledger, the accounts would contain no evidence of the continued existence of the asset. In addition, the cost and the accumulated depreciation data on such assets are often needed for property tax and income tax purposes.

Discarding Fixed Assets

When fixed assets are no longer useful to the business and have no residual or market value, they are discarded. To illustrate, assume that an item of equipment acquired at a cost of $25,000 is fully depreciated at December 31, the end of the preceding fiscal year. On February 14, the equipment is discarded. The entry to record this is as follows:

If an asset has been fully depreciated, depreciation should be recorded prior to removing it from service and from the accounting records. To illustrate, assume that equipment costing $6,000 is depreciated at an annual straight line rate of 10%. In addition, assume that on December 31 of the preceding fiscal year, the accumulated depreciation balance, after adjusting entries, is $4,750. Finally, assume that the asset is removed from service on the following March 24. The entry to record the depreciation for the three months of the current period prior to the asset's removal from service is as follows:

The discarding of the equipment is then recorded by the following entry:

The loss of $1,100 is recorded because the balance of the accumulated depreciation account ($4,900) is less than the balance in the equipment account ($6,000). Losses on the discarding of fixed assets are nonoperating items and are normally reported in the Other Expense section of the income statement.

Selling Fixed Assets

The entry to record the sale of a fixed asset is similar to the entries Illustrated above, except that the cash or other asset received must also be recorded. If the selling price is more than the book value of the asset, the transaction results in a gain. If the selling price is less than the book value, there is a loss.

To illustrate, assume that equipment is acquired at a cost of $10,000 and is depreciated at an annual straight line rate of 10%. The equipment is sold for cash on October 12 of the eighth year of its use. The balance of the accumulated depreciation account as of the preceding December 31 is $7,000. The entry to update the depreciation for the nine months of the current year is as follows:

After the current depreciation is recorded the book value of the asset is $2,250 ($10,000 - $7,750) .The entries to record the sale, assuming 3 different selling prices, are as follows: 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 404-406*

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