{"id":777,"date":"2015-05-13T17:07:23","date_gmt":"2015-05-13T17:07:23","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=777"},"modified":"2015-05-27T15:44:06","modified_gmt":"2015-05-27T15:44:06","slug":"journalizing-entries-for-write-off","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/journalizing-entries-for-write-off\/","title":{"raw":"Asset Disposal","rendered":"Asset Disposal"},"content":{"raw":"
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Disposal of plant assets<\/strong><\/h4>\r\n

All plant assets except land eventually wear out or become inadequate or obsolete and must be sold, retired, or traded for new assets. When disposing of a plant asset, a company must remove both the asset\u2019s cost and accumulated depreciation from the accounts. Overall, then, all plant asset disposals have the following steps in common:<\/p>\r\n

\u2022Bring the asset\u2019s depreciation up to date.<\/p>\r\n

\u2022Record the disposal by:<\/p>\r\n

\u2022Writing off the asset\u2019s cost.<\/p>\r\n

\u2022Writing off the accumulated depreciation.<\/p>\r\n

\u2022Recording any consideration (usually cash) received or paid or to be received or paid.<\/p>\r\n

\u2022Recording the gain or loss, if any.<\/p>\r\n

As you study this section, remember these common procedures accountants use to record the disposal of plant assets. In the paragraphs that follow, we discuss accounting for the (1) sale of plant assets, (2) retirement of plant assets without sale (write it off) , and\u00a0(3)\u00a0trading plant assets.\u00a0 Watch this video to demonstrate the first 2:<\/p>\r\n

Sale of plant assets<\/strong><\/p>\r\n

Companies frequently dispose of plant assets by selling them. By comparing an asset\u2019s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset\u2019s book value, the company shows a gain. If the sales price is less than the asset\u2019s book value, the company shows a loss. Of course, when the sales price equals the asset\u2019s book value, no gain or loss occurs.<\/p>\r\nhttps:\/\/youtu.be\/s45Fz0JCydM\r\n

\u00a0To illustrate accounting for the sale of a plant asset, assume that a company sells equipment costing\u00a0 $45,000 with accumulated depreciation of\u00a0$ 14,000 for\u00a0$28,000 cash.\u00a0 The company would realizes a loss of\u00a0$ 3,000 ($45,000 cost - $14,000 accumulated depreciation is $31,000 book value\u2014 $28,000 sales price). The journal entry to record the sale is:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nCash<\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n28,000<\/strong><\/td>\r\n\n\n\u00a0Credit<\/strong>\r\n\r\n <\/td>\r\n<\/tr>\r\n
Accumulated Depreciation\u2014Equipment <\/strong><\/td>\r\n14,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Loss from Disposal of Plant Asset <\/strong><\/td>\r\n3,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Equipment <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n45,000<\/strong><\/td>\r\n<\/tr>\r\n
To record the sale of equipment at a price less than<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
book value.<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAccounting for depreciation to date of disposal<\/strong> When selling or otherwise disposing of a plant asset, a firm must record the depreciation up to the date of sale or disposal. For example, if it sold an asset on April 1 and last recorded depreciation on December 31, the company should record depreciation for three months (January 1-April 1). When depreciation is not recorded for the three months, operating expenses for that period are understated, and the gain on the sale of the asset is understated or the loss overstated.\r\n\r\nTo illustrate, assume that on 2016 August 1, Ray Company sold a machine for\u00a0 $1,500. When purchased on 2008 January 2, the machine cost\u00a0$12,000; Ray was depreciating it at the straight-line rate of 10% per year. As of 2015 December 31, after closing entries were made, the machine\u2019s accumulated depreciation account had a balance of\u00a0 $\u00a09,600. Before determining a gain or loss and before making an entry to record the sale, the firm must make the following entry to record depreciation for the seven months ended 2016 July 31:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nJuly<\/strong><\/td>\r\n\n\n \r\n\r\n31<\/strong><\/td>\r\n\n\n \r\n\r\nDepreciation Expense\u2014Machinery <\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n700<\/strong><\/td>\r\n\n\n\u00a0Credit<\/strong>\r\n\r\n <\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\nAccumulated Depreciation\u2014Machinery <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n700<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\nTo record depreciation for seven months<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n[$12,000 X 0.10 X (7\/12)]<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen retiring a plant asset from service, a company removes the asset\u2019s cost and accumulated depreciation from its plant asset accounts. For example, Hayes Company would make the following journal entry when it retired a fully depreciated machine that cost\u00a0$15,000 and had no salvage value:\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nAccumulated Depreciation\u2014Machinery <\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n15,000<\/strong><\/td>\r\n\n\n\u00a0Credit<\/strong>\r\n\r\n <\/td>\r\n<\/tr>\r\n
Machinery <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n15,000<\/strong><\/td>\r\n<\/tr>\r\n
To record the retirement of a fully depreciated machine.<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOccasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset\u2019s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its cost.\r\n\r\nSometimes a business retires or discards a plant asset before fully depreciating it. When selling the asset as scrap (even if not immediately), the firm removes its cost and accumulated depreciation from the asset and accumulated depreciation accounts. In addition, the accountant records its estimated salvage value in a Salvaged Materials account and recognizes a gain or loss on disposal. To illustrate, assume that a firm retires a machine with a\u00a0$10,000 original cost and\u00a0$7,500 of accumulated depreciation. If the machine\u2019s estimated salvage value is\u00a0$500, the following entry is required:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nSalvaged materials <\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n500<\/strong><\/td>\r\n\n\n\u00a0Credit<\/strong>\r\n\r\n <\/td>\r\n<\/tr>\r\n
Accumulated Depreciation\u2014Machinery<\/strong><\/td>\r\n7,500<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Loss from Disposal of Plant Assets <\/strong><\/td>\r\n2,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Machinery <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n10,000<\/strong><\/td>\r\n<\/tr>\r\n
To record the retirement of machinery, which will be<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
sold for scrap at a later time.<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSometimes accidents, fires, floods, and storms wreck or destroy plant assets, causing companies to incur losses. For example, assume that fire completely destroyed an uninsured building costing\u00a0$40,000 with up-to-date accumulated depreciation of\u00a0$12,000. The journal entry is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nLoss from Fire<\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n28,000<\/strong><\/td>\r\n\n\nCredit<\/strong>\r\n\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Accumulated Depreciation\u2014Buildings <\/strong><\/td>\r\n12,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Buildings <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n40,000<\/strong><\/td>\r\n<\/tr>\r\n
To record fire loss.<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf the building was insured, the company would debit only the amount of the fire loss exceeding the amount to be recovered from the insurance company to the Fire Loss account. To illustrate, assume the company partially insured the building and received $22,000 from the insurance company. The journal entry is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\n\n \r\n\r\nCash\u00a0<\/strong><\/td>\r\n\n\nDebit<\/strong>\r\n\r\n22,000<\/strong><\/td>\r\n\n\n\u00a0Credit<\/strong>\r\n\r\n <\/td>\r\n<\/tr>\r\n
Loss from Fire<\/strong><\/td>\r\n6,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Accumulated Depreciation\u2014Buildings <\/strong><\/td>\r\n12,000<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Buildings <\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n40,000<\/strong><\/td>\r\n<\/tr>\r\n
To record fire loss and amount recoverable from<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
insurance company.<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n \r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\nhttp:\/\/www.openassessments.com\/assessments\/1192\r\n\r\n \r\n\r\n<\/div>","rendered":"
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Disposal of plant assets<\/strong><\/h4>\n

All plant assets except land eventually wear out or become inadequate or obsolete and must be sold, retired, or traded for new assets. When disposing of a plant asset, a company must remove both the asset\u2019s cost and accumulated depreciation from the accounts. Overall, then, all plant asset disposals have the following steps in common:<\/p>\n

\u2022Bring the asset\u2019s depreciation up to date.<\/p>\n

\u2022Record the disposal by:<\/p>\n

\u2022Writing off the asset\u2019s cost.<\/p>\n

\u2022Writing off the accumulated depreciation.<\/p>\n

\u2022Recording any consideration (usually cash) received or paid or to be received or paid.<\/p>\n

\u2022Recording the gain or loss, if any.<\/p>\n

As you study this section, remember these common procedures accountants use to record the disposal of plant assets. In the paragraphs that follow, we discuss accounting for the (1) sale of plant assets, (2) retirement of plant assets without sale (write it off) , and\u00a0(3)\u00a0trading plant assets.\u00a0 Watch this video to demonstrate the first 2:<\/p>\n

Sale of plant assets<\/strong><\/p>\n

Companies frequently dispose of plant assets by selling them. By comparing an asset\u2019s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset\u2019s book value, the company shows a gain. If the sales price is less than the asset\u2019s book value, the company shows a loss. Of course, when the sales price equals the asset\u2019s book value, no gain or loss occurs.<\/p>\n