Disposal of Fixed Assets
Disposal of a fixed asset is the withdrawal of a fixed asset from use upon the completion of its useful life or due to lower productivity in its later life.
Disposal of an Asset with no Salvage Value
Gain on Disposal
However, if an asset has a salvage value; it is likely that the disposal will cause gain or loss.
When a fixed asset is sold at a price higher than its carrying amount at the date of disposal, the excess of sale proceeds over the carrying amount is recognized as gain.
On January 1, 2006 Company A purchased equipment worth of $2 million. The company estimated the salvage value to be $0.2 million at the end of its useful life of 5 years.
The company charges depreciation expense of (2,000,000 − 200,000) ÷ 5 or $360,000 each year. Carrying amount at the end of its useful i.e. December 31, 2010 is $0.2 million. The company succeeded in selling the asset for $0.5 million on that date. Since the sale proceeds exceed the carrying amount by $0.3 million so a gain is to be recognized using the following journal entry:
|Gain of Disposal||300,000|
The equipment account and the related accumulated depreciation account are written off in the process of disposal and the gain is reported in income statement.
Loss on Disposal
If a fixed asset is sold at a price lower than its carrying amount at the date of disposal, a loss is recognized equal to the excess of carrying amount over the sale proceeds.
Assume that in the above example the sale proceeds were only $100,000. The carrying amount at the date of disposal was $200,000 so there is a loss of $100,000 since carrying amount exceeds sale proceeds.
The following journal entry is passed to record loss on disposal.
|Loss of Disposal||100,000|
The loss in reported in income statement.
No Gain / Loss on Disposal
If the carrying amount of a fixed asset at the date of disposal is equal to the sale proceeds there is neither gain nor loss.
Assumed further that at the date of purchase Kingston Inc. entered into an agreement with USB Ltd. according to which USB had to purchase the asset at the end of its useful life of 5 years at a price of $0.2 million.
On December 31, 2006 Kingston delivered the derecognized asset to USB for $0.2 million. Since carrying amount is equal to sale proceeds so no gain or loss is to be recognized. The journal entry would be:
Written by Obaidullah Jan, ACA, CFA