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Asset disposal is selling, donating, or removing an asset from the business, so the business no longer owns or uses the asset.
An asset would be disposed of if the asset may have reached the end of its useful life and a company may need to upgrade the asset. Instead, the company may need an asset that has increased utility, quality, efficiency, or a different style, perhaps because there are new manufacturing techniques or equipment, or assets that have a different functionality.
You can dispose of an asset by:
Prior to recording, the depreciation expense needs to be recorded through the date of disposal, regardless of the disposal method. So, whether you donate it, sell it, or scrap it, you need to perform this step.
You need to do this to have an accurate book value, or carrying value, prior to recording the disposal. Remember, book value is the cost of a depreciable asset, less its accumulated depreciation, and carrying value is the book value of an asset cost, less accumulated depreciation. You need to have an accurate value in order to properly record the disposal.
EXAMPLE
Suppose ABC Company disposes of equipment on June 30, 2013. The equipment costs $50,000 and was purchased January 1, 2010, and has a useful life of five years.Next, let's shift our focus to how to record asset disposal. The asset, and all of its related accounts, must be removed from the books; you are essentially taking everything related to this asset off the books.
In order to do this, you make an entry to the opposite side of the natural balance. Remember, an asset is removed with a credit, and accumulated depreciation is removed with a debit.
When you sell an asset, an asset will be sold at market value, which is the price at which an asset could be bought or sold. Market value is what someone is willing to pay you for that asset.
Remember, there are three outcomes:
EXAMPLE
Let's look at each of these scenarios, using the same example as above with ABC Company. Again, ABC Company has disposed of $50,000 of equipment on June 30, 2013.Suppose we have a market value of $20,000, this means we will get $20,000 in cash by selling the equipment. Now, we need to remove the accumulated depreciation, as well as remove the equipment cost, and then record a gain of $5,000.
To compute this gain, it's the sale price minus the carrying value.
Suppose we have a market value of $5,000. Because it's the market value, the cash that we will receive is $5,000. Again, we still need to remove our accumulated depreciation and our equipment. Then, we record a loss.
The loss is calculated as a $5,000 sale, minus a $15,000 carrying value, resulting in a $10,000 loss.
Suppose the market value is $15,000--the amount of cash we will receive. We remove our accumulated depreciation from the books, remove our equipment from the books, and that's it. We don't record a gain or a loss.
Because it was a $15,000 sale, and we have a $15,000 carrying value, so there is no gain or loss. We sold the asset for its carrying value, or book value.
Source: This work is adapted from Sophia author Evan McLaughlin.