Disposal of fixed assets

Disposal of fixed assets
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Disposal of fixed assets - includes sell, scrap, donate or retire fixed assets. In each of these situations fixed assets are removed from the accounts[1].To understand process of disposal of fixed assets first we need to know some basic information about fixed assets and accounts that are associated with them and also the way they’re function. Fixed assets are long-term or relatively permanent assets for example machinery, equipment, means of transport, buildings etc. The initial value of the fixed assets is book on the debit side on the fixed assets account. As time passes, Depreciation of fixed assets is recorded on debit side on the accumulated depreciation. Net book value of fixed asset is a difference between the value recorded in the fixed assets account and the depreciation value[2].

Disposal of fully depreciated fixed assets[edit]

The fixed assets are discarded when they’re no longer used and have no residual value. One of example: if a fixed asset is fully depreciation and has no longer residual value, it’s discarded. This activity is related with removes the asset and is related accumulated depreciation from the ledger[3].

Example of discarding fully depreciated car The company bought a car, which was cost 25 000 USD. They’re recognizes 5 000 USD of depreciation per year over the following five years. The car is fully depreciated at December on 2017. On February of 2018 this fived asset is ready for the scrap heap, so is discarded. The company gives away the car for free. The entry to record the discarded is as follow: The debit side of Accumulated Depreciation – Car: 25 000 USD The credit side of Car: 25 000 USD. To write of car discarded[4].

Disposal of fixed assets by selling[edit]

In the case of sale of fixed asset, the entry to record of fixed asset is similar to the entries for discarding an asset. The difference is the receipt of cash is also recorded. The method of its removal from the accounts depends on whether it was sold at a profit, loss or no profit and no loss. If there is a gain on disposal, a Gain on Disposal of Fixed account must be opened. If there is a loss, a Loss on Disposal of Fixed Asset account must be opened[5].

Example of discarding a car sold The car is purchased at cost of 30 000 USD with no estimated residual value. It’s depreciated at a straight-line rate of 20%. The car is sold for cash on May 2018 in the fifth year of its use. The balance of the accumulated depreciation account at the end of the previous year is 24 000 USD. The depreciation for the five months of the current year is 2 500 USD (30 000 USD x 5/12 x 20%). After the current depreciation is recorded, the book value of the car is 3 500 USD (30 000 USD – 26 500 USD)[6].

Option 1 Sold at book value, for 3 500 USD with no gain or loss:

  • The debit side of Cash: 3 500 USD
  • The debit side of Accumulated Depreciation – Car: 26 500 USD
  • The credit side of Car: 30 000 USD

Option 2 Sold below book value, for 2 500 USD with loss of 1 000 USD:

  • The debit side of Cash: 2 500 USD
  • The debit side of Accumulated Depreciation – Car: 26 500 USD
  • The debit side of Loss on Sale of Car: 1 000 USD
  • The credit side of Car: 30 000 USD

Option 3 Sold above book value, for 5 000 USD with gain of 1 500 USD:

  • The debit side of Cash: 5 000 USD
  • The debit side of Accumulated Depreciation – Car: 26 500 USD
  • The credit side of Gain on Sale of Car: 1 500 USD
  • The credit side of Car: 30 000 USD

Footnotes[edit]

  1. Hall J. (2008), Accounting Information Systems
  2. Warren C., Reeve J., Duchac J. (2009), Corporate Financial Accounting
  3. Reeve J., Warren C, Duchac J. (2012), Financial & Managerial Accounting. Using excel for Success
  4. Vyas N. (2007), Principles of Accounts. Formats and Equations
  5. Vyas N. (2007), Principles of Accounts. Formats and Equations
  6. Warren C., Reeve J., Duchac J. (2009), Corporate Financial Accounting

References[edit]

Author: Sławomir Maciejowski