Disposal of Operating Assets: Explanation

When accounting for the disposal of operating assets, the firm should record a gain or loss for the difference between the net salvage proceeds and the asset’s book value as of the disposal date.

It should be noted that any gain or loss from disposing of an asset is only an adjustment to income caused by inaccurate estimates of salvage value or service life.

To measure the gain or loss and operating income, the book value should be adjusted by the partial year’s depreciation expense prior to recording the disposal.

Example

For example, consider this asset:
Information About Asset

The book value as of 31 December 20×3 is computed under the half-year convention for partial year’s depreciation as follows:

Calculation of Book Value

The following journal entry would be made to record the depreciation for the first half of 20×4 (one-half year’s depreciation):

Journal Entry For Partial Year's Depreciation

In addition, the journal entry below would be made to record the disposal (note that the amount of accumulated depreciation is the sum of $52,500 and $10,500).

Journal Entry For Disposal of Operating Assets

In practice, these two journal entries are likely to be combined.

The net gain or loss on all disposals should appear separately in the income statement only if the amount is material. If the disposal removes a significant segment of operating capacity, it should be reported as a discontinued operation.

The SCFP should identify the amount of working capital provided by disposals ($35,000 for the example above) and should adjust the income figure for any gains or losses to present the amount of working capital provided by operating activities alone.

If the seller accepts a note receivable from the buyer, the realistic interest rate should be used to determine the selling price of the asset. If the seller accepts another asset in exchange, there may or may not be a gain or loss on the exchange.

If the disposal occurs as a result of a casualty, such as theft, fire, or storm damage, the cash settlement received from insurance is added to the proceeds.

Frequently Asked Questions

What is meant by the disposal of operating assets?

When accounting for the disposal of operating assets, a gain or loss must be recorded as if the asset were sold for its net Salvage Value.

How do you record the disposal of an operating asset?

The book value of the disposed-of asset should be adjusted by a partial year’s Depreciation to determine the amount of gain or loss. In addition, any gain or loss from disposing of an asset is only an adjustment to income caused by inaccurate estimates of Salvage Value or service life.

How do you measure the gain or loss on the disposal of an asset?

The net gain or loss on all disposals should appear separately in the income statement only if the amount is material. Any gain or loss from disposing of an asset is only an adjustment to income caused by inaccurate estimates of Salvage Value or service life. To measure the gain or loss and operating income, the book value should be adjusted by the partial year’s Depreciation.

If the disposal occurs as a result of an involuntary conversion due to fire, storm damage, etc., what amount will be reported?

Any cash settlement received from insurance is added to the proceeds. The net estimate of property damage, which is the cash settlement less insurance received, is also added to the proceeds.

What are some examples of operating assets that are not sold?

Purchased goodwill, franchises, patents, licenses, and trademarks do not qualify for sale treatment because they have no real market value. The recovery of an asset through its operation does not justify its disposal.

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