Disposal of Fixed Assets

Over time a fixed asset may decline in usefulness or discontinue providing a benefit to the business entity. Once this occurs business entities will either dispose of or sell the asset. To dispose of a fixed asset, the business entity must remove the asset from the accounting records. The entry to remove the asset will vary depending on the remaining net book value of the asset, whether it is scrapped or sold, and if sold, how much it is sold for.

Big Truck Company has an old piece of equipment it no longer wishes to use. The equipment was originally purchased for $28,000, has an estimated useful life of 10 years, and has no residual value. Big Truck Company uses straight-line depreciation. At this time 11 years have passed, and Big Truck Company has depreciated the equipment down to its residual value of $0. The machine has no value in the market, so the company is not able to sell it. The equipment is scrapped. Big Truck Company will make an entry to remove the asset when it is scrapped. Disposing of a fully depreciated fixed asset will not have an effect on net assets as the book value is already $0.

In the event that an asset is not fully depreciated, the depreciation for the current period should be recorded prior to removing the asset from the accounting records. For example, Big Truck Company’s machinery with a cost of $28,000 with no residual value and estimated useful life of 10 years is set to be discarded after 8 years of service on April 1, 2018. In this case straight-line depreciation was used.

$\$28\rm{,}000/10 \text{\;Years}=\$2\rm{,}800$ of depreciation had been recorded each year for the first 8 years of service. Accumulated depreciation thus has a balance of $22,400 at the beginning of this year. Big Truck Company must record depreciation for January through April 1 of this year before making the entry to dispose of the machine. Depreciation for January, February, and March totals $700. Depreciation for these 3 months is $2,800 times 3 out of 12 months.

Accumulated depreciation has a balance of $22,400 at the beginning of the year, and an additional $700 is recorded for the current year, bringing the balance to $23,100. Then Big Truck Company will make an entry to discard the machine.

The loss of $4,900 is determined by subtracting the accumulated depreciation from the machinery account balance. The loss should be reported on the income statement in the period in which the asset is disposed of.

Business entities may also sell fixed assets they no longer use. The assets are removed from the accounting records at book value. If the cash received is equal to book value, no gain or loss is recorded. If the cash received is greater than the book value, the asset is sold at a gain. Conversely, if the asset is sold for a price less than the book value, the asset is sold at a loss.

Big Truck Company is selling its machine on April 1 this year with a cost of $28,000 with no residual value and estimated useful life of 10 years. Straight-line depreciation is used on this asset and has been recorded up to date as of April 1, bringing the accumulated depreciation for the asset to $23,100. Thus, current book value is $4,900 ($28,000 initial cost less $23,100 accumulated depreciation). The machine is being sold for $4,900. Big Truck Company will make an entry to sell the machine at book value.

Big Truck Company will record a loss if it sold the machine below book value at $4,000.

Big Truck Company will record a gain if it sold the machine above book value at $6,000.