Week 2, DQ2 - Fixed assets may be disposed of in several...

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Week 2, DQ2 How do we account for the disposition of fixed assets? What are the differences in how the exchanges of assets are handled, pending on whether they are similar or dissimilar? What is the rationale for these differences? What is the impact to the companies’ financial statements? Fixed assets are those assets that a business purchases with the intent to keep during the asset’s useful life. Should a company decide to dispose of a fixed asset, it usually indicates that the asset is no longer useful or that the asset needs to be replaced because of new technology. Asset disposal normally involves selling the asset for either a gain or loss. The gain/loss is the difference between the asset’s sales price and net book value, at the time of disposal. The gain or loss is reported on the income statement and called “profit/loss on disposal of non-current assets”.
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Unformatted text preview: Fixed assets may be disposed of in several ways, for example, the asset may become obsolete, sold, trashed, traded-in, or donated. If cash is received during the disposition of a fixed asset, cash and revenue should be recognized. A similar asset exchange involves exchanging one asset for another with the similar type of function. For example, when an old delivery truck is traded-in for a new delivery truck. A dissimilar asset exchange is the exchange of one asset for another that performs an entirely different function. An example of this would be to trade-in a company car for a forklift. Losses on similar or dissimilar exchanges are reported as they occur. Gains on similar exchanges are generally deferred. Gains on similar exchanges reduce the cost of the new asset. Gains on dissimilar exchanges are reported as they occur....
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