Lesson: 31

Topic: Disposing of Depreciated Assets

Objectives:

The student will come to understand how to account for the disposal of assets which have already been depreciated.

The fact is, we cannot predict exactly what we will receive for any given asset at the end of its useful life. We may sell the asset for the exact amount that we predicted as our disposal value, we might get more, or we might get less. Although the exact disposal value of our assets is always unpredictable, in the end we will produce a compound entry that will both facilitate the transaction sale, as well as the adjustment required to make our accounts balance. So although it's something unpredictable, in the end it's right. (Nobody expresses this topic better than Green Day in their song that pays tribute to the disposal of depreciated assets, Good Riddance.)

The primary focus for the class will be learning how to record the disposal of assets under any of the following conditions:

• sale for disposal value,
• sale for more than disposal value, and
• sale for less than disposal value.

Example:

Data:

Journal Entries:

When we dispose of an asset for the precise amount we originally predicted, we simply have to close the asset account involved, close its associated Accumulated Depreciation account (the contra account which records the value which has been lost due to depreciation), and account for the money (or account receivable) which we have received in exchange for the asset.
• Thus, we will debit the Cash account

• We will also debit the Accumulated Depreciation account for its entire balance (in order to close it).

• Finally, we will credit the particular asset account, for example the Computer Equipment account, for its entire balance (to close it).

  
  

Date	Account	Debit	Credit
Dec. 31	Cash	500.00
	Accumulated Depreciation/Computer Equipment	2,500.00
	Computer Equipment		3,000.00

When we dispose of an asset for more than the amount we originally predicted, we will have to close the asset account involved, close its associated Accumulated Depreciation account (the contra account which records the value which has been lost due to depreciation), account for the money (or account receivable) which we have received in exchange for the asset, and we will have account for the fact that we gained more value in assets than we lost! Thus, we will create a revenue account to record this unexpected inflow.
• We will debit the Cash account

• We will debit the Accumulated Depreciation account for its entire balance (in order to close it).

• We will credit the particular asset account, for example the Computer Equipment account, for its entire balance (to close it).

• Finally, we will also credit a new revenue account called Gain on Disposal of Computer Equipment.

  
  

Date	Account	Debit	Credit
Dec. 31	Cash	800.00
	Accumulated Depreciation/Computer Equipment	2,500.00
	Computer Equipment		3,000.00
	Gain on Disposal of Computer Equipment		300.00










Loss on Disposal

When we dispose of an asset for less than the amount we originally predicted, we will have to close the asset account involved, close its associated Accumulated Depreciation account (the contra account which records the value which has been lost due to depreciation), account for the money (or account receivable) which we have received in exchange for the asset, and we will have account for the fact that we lost more value in assets than we gained! Thus, we will create an expense account to record this loss.
• We will debit the Cash account

• We will debit the Accumulated Depreciation account for its entire balance (in order to close it).

• We will also debit a new expense account called Loss on Disposal of Computer Equipment.

• Finally, we will credit the particular asset account, for example the Computer Equipment account, for its entire balance (to close it).

  
  

Date	Account	Debit	Credit
Dec. 31	Cash	300.00
	Loss on Disposal of Computer Equipment	200.00
	Accumulated Depreciation/Computer Equipment	2,500.00
	Computer Equipment		3,000.00

In addition, the student will learn how to adjust the accumulated amortization account just ahead of disposal, so that this account is updated to include the cost of amortization in the final accounting period.

Finally, the student will examine Revenue Canada's Capital Cost Allowance method of depreciating fixed assets - especially the 50% rule and the nearest whole month rule.

Instructional Methods and Evaluation:

After a Socratic lecture on the topics outlined above, students will complete the disposal of assets excel exercise.

Expectations Addressed:

The "Fundamental Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Introduction to Accounting as a Discipline:

  • explain the purpose of accounting;

  • explain the difference between accounting and bookkeeping;

  • identify the users and uses of accounting;

  • identify the Generally Accepted Accounting Principles (GAAP) and explain their importance.
• Business Structures:
  • describe the characteristics of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • describe the advantages and disadvantages of different forms of business organization, including sole proprietorship, partnership, and corporation;
  • explain the differences among the equity sections of different forms of business organization, including sole proprietorship, partnership, and corporation (e.g., capital account in a sole proprietorship versus common stock in shareholders’ equity in a corporation).
• The Accounting Cycle for a Service Business:
  • assess the effects that transactions have on the accounts and financial statements of a service business;
  • record transactions using the journals and ledgers of a service business;
  • prepare a trial balance and the financial statements for a service business;
  • record adjusting and closing entries for a service business (e.g., prepaid expenses, amortization, accruals);
  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a service business;
  • apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business.

Reference:

Please read this topic (pages 645 - 661) in preparation for the class.