Asset Retirement

Learning Outcomes

  • Journalize entries for discarding of plant assets

When retiring a plant asset from service, a company removes the asset’s cost and accumulated depreciation from its plant asset accounts. For example, Hassan Company would make the following journal entry when it disposed of a fully depreciated machine that cost $15,000 and had no salvage value:

JournalPage 101
Date Description Post. Ref. Debit Credit
Accumulated Depreciation—Machinery 15,000.00
      Machinery 15,000.00
To record the retirement of a fully depreciated machine.

The asset would also be removed from the fixed asset list (subsidiary ledger) since it no longer physically exists (except maybe as a rusting piece of junk in the junkyard).

Occasionally, 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’s 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 depreciable cost (historical cost − salvage value).

Sometimes 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 $10,000 original cost and $7,500 of accumulated depreciation. If the machine’s estimated salvage value is $500, the following entry is required:

JournalPage 101
Date Description Post. Ref. Debit Credit
Salvaged materials 500.00
Accumulated Depreciation—Machinery 7,500.00
Loss from Disposal of Plant Assets 2,000.00
      Machinery 10,000.00
To record the retirement of machinery, which will be sold for scrap at a later time.

Sometimes 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 $40,000 with up-to-date accumulated depreciation of $12,000. The journal entry is:

JournalPage 101
Date Description Post. Ref. Debit Credit
Loss from Fire 28,000.00
Accumulated Depreciation—Buildings 12,000.00
      Buildings 40,000.00
To record fire loss.

If 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:

JournalPage 101
Date Description Post. Ref. Debit Credit
Cash 22,000.00
Loss from Fire 6,000.00
Accumulated Depreciation—Buildings 12,000.00
      Buildings 40,000.00
To record fire loss and amount recoverable from insurance company.

Here is an overview of the process:

We’ll next learn how to journalize entries for sale of assets.

practice question