Asset Disposal

What is Asset Disposal?

Asset disposal, also called de-recognition, is the removal of a long-term asset from a company’s financial records. If there is a difference between disposal proceeds and carrying value, a disposal gain or loss occurs.

Asset disposal is accounted for by removing the asset cost and any accumulated depreciation and impairment losses from the balance sheet, and recognizing any and cash receipts and the resulting gain or loss on the income statement.

Explanation of the Accounting

In order to account the asset disposal there are three likely options:

• Fully depreciated asset: With zero proceeds from the disposal, debit accumulated depreciation and credit the fixed asset account.
• Gain on asset sale: Debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of the asset account.
• Loss on asset sale: Debit cash for the amount received, debit all accumulated depreciation, debit the loss on the sale of an asset account, and credit the fixed asset.

Disposal of a Fully Depreciated Asset

When an asset reaches the end of its useful life and is fully depreciated, asset disposal occurs by means of a single entry in the general journal. The accumulated depreciation account is debited, and the relevant asset account is credited.

On the disposal of an asset with zero net book value and zero salvage value, no gain or loss is recognized because both the cash proceeds and carrying amounts are zero.

Example

Company A owns machinery that was originally bought for $28,000 with an estimated useful life of five years. After five years, the machinery is fully depreciated with a residual value of $0. Company A uses a straight-line depreciation policy. The machinery has $0 net book value and should be scrapped. In such a case, the asset’s value and the accumulated depreciation must be written off.

Required: Show the journal entries to record this asset disposal transaction by Company A.

Answer: Fully Depreciated, Scrapped, Asset Disposal Journal Entry

Asset Disposal with a Gain

If an asset is sold for more than its carrying value, a gain on disposal occurs which will be recorded in the general journal.

Example

Company A acquired a new machine at a cost of $40,000 with an estimated useful life of 5 years and a residual value of $5,000. After three years, the company decides to sell the machine for $20,000. Thus, a gain on disposal of $1,000 was realized.

Required: Record the asset disposal with journal entries, calculating the accumulated depreciation (straight-line method).

Asset Disposal with a Loss

If asset disposal proceeds are less than its carrying amount, the loss on disposal is realized, which will then be recorded in the general journal.

Example

Let’s suppose that for the above example, Company A sells the machine for only $16,000. As the carrying amount exceeds the disposal proceeds, a loss of $3,000 occurs on disposal.

Required: Show the journal entries to record this asset disposal transaction.

Answer: Loss on Sale of Machinery Journal Entry

Management should put in place essential controls to prevent any fraud risks with asset disposal.