Question

Explain the entries an accountant will need when disposing of a fixed asset which is NOT FULLY depreciated. Assume that asset is simply being retired without the receipt of any cash. List the accounts and whether you would debit or credit them and why. Is it possible to recognize a gain in this situation? Why or why not?

Answer 1

A) Entry for disposing an asset which is not fully depreciated is as mentioned below. Accumulated depreciation account would be debited. Loss of disposal and Asset account would be credited.

Accumulated Depreciation - Asset Dr

To Loss of Disposal Cr

To Cost-Asset CR

B) It is not possible to recognize a gain in the situation, as asset is being retired without any cash receipt. Asset still has an amount which is not depreciated and thus still has a value, which is being retired. For example

Company A purchased a specialized trading terminal for $4 million on 1 January 2012. The company expected the system to last 5 years and generate a residual value of $0.5 million.However, due to rapid changes in technology, the company was forced to abandon the system only after 2 years to invest in new infrastructure. In the two years, the depreciation expense charged i.e. the accumulated depreciation on the terminal = ($4 million – $0.5 million) ÷ 5 × 2 = $1.4 million.Carrying amount at the time of disposal = $4 million – $1.4 million = $2.6 million.Since there are no cash proceeds but the carrying amount (i.e. $2.6 million), the disposal has resulted in a loss of $2.6 million.