Disposal of fixed assets

Disposal of fixed assets - includes sell, scrap, donate or retire fixed assets. In each of these situations fixed assets are removed from the accounts.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.

Disposal of fully depreciated fixed assets

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.

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 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.

Disposal of fixed assets by selling

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.

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).

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

Examples of Disposal of fixed assets

• Sell: Fixed assets can be sold off to another company or entity in exchange for cash or other forms of payment. For example, a company may decide to sell off a piece of machinery that is no longer being used, in order to generate funds for other investments.
• Scrap: If a fixed asset can no longer be used, it may be scrapped. This means that the asset is dismantled and then sold for parts, or recycled. For example, a company may decide to scrap an old computer system, and then sell off the individual components for parts.
• Donate: Fixed assets can also be donated to another company or organization. For example, a company may donate an old computer system to a local school in order to help them with their technology needs.
• Retire: Fixed assets can also be retired from use. This means that the asset is no longer being used, but is still owned by the company. For example, a piece of machinery may be retired if it is no longer needed or is no longer efficient.

Advantages of Disposal of fixed assets

Disposing of fixed assets can be beneficial for a company in many ways. These include:

• Generating cash - Selling or scrapping fixed assets can generate immediate cash which can be used to finance operations or invest in new assets.
• Freeing up space - Donating or retiring fixed assets can free up space which can be used for other purposes.
• Avoiding maintenance costs - Disposing of fixed assets can reduce costs associated with maintenance and repairs.
• Tax benefits - Donating fixed assets can provide tax deductions for the company.
• Improving efficiency - By disposing of outdated or inefficient fixed assets, companies can improve their operations and increase their efficiency.

Limitations of Disposal of fixed assets

Disposal of fixed assets involves several limitations, such as:

• Loss of value - Selling a fixed asset may result in a loss of value due to depreciation, age or other factors.
• Taxes - When a fixed asset is sold, the proceeds may be subject to taxation depending on the jurisdiction.
• Transaction costs - Selling or disposing of a fixed asset may incur additional costs, such as broker fees, legal costs or advertising costs.
• Environmental considerations - When disposing of a fixed asset, it is important to consider any environmental costs or liabilities associated with the asset.
• Regulatory considerations - Disposing of a fixed asset may require the approval of certain regulatory bodies, such as local governments or environmental agencies.

Other approaches related to Disposal of fixed assets

Disposal of fixed assets includes a range of activities that involve the removal of fixed assets from an entity's books. This includes the sell, scrap, donate or retire fixed asset approaches.

• Sell - involves the sale of an asset to another party for an agreed upon price. The entity will recognize a gain or loss on the asset depending on the difference between the sale price and the net book value of the asset.
• Scrap - involves the disposal of an asset for its scrap value. The entity will recognize a loss on the asset equal to the difference between the net book value of the asset and the amount received from the disposal.
• Donate - involves the donation of an asset to a charity or other organization. The entity will recognize a loss on the asset equal to the difference between the net book value of the asset and the fair market value of the asset at the time of donation.
• Retire - involves the permanent removal of an asset from the entity's books, usually when the asset is no longer useful or functional. The entity will recognize a loss on the asset equal to the difference between the net book value of the asset and any proceeds from the disposal.

In summary, disposal of fixed assets involves a range of activities including the sell, scrap, donate or retire approaches. Each of these activities requires the removal of the asset from the entity's books and the recognition of a loss or gain as applicable.

Footnotes

Disposal of fixed assets — recommended articles

Matching principle — Direct lease — Depreciation vs. amortization — Non-operating expense — Asset based approach — Fictitious asset — Distribution In Kind — Sundry income — Prepaid rent

References

• Hall J. (2008), Accounting Information Systems, South-Western Cengage Learning
• Reeve J., Warren C, Duchac J. (2012), Financial & Managerial Accounting. Using excel for Success, South-Western Cengage Learning
• Vyas N. (2007), Principles of Accounts. Formats and Equations, Pearson Education South Asia
• Warren C., Reeve J., Duchac J. (2010), Corporate Financial Accounting, South-Western Cengage Learning

Author: Sławomir Maciejowski