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Chapter 1.8® - Disposal or Discarding of Capital Assets, Associated Disposal Journal Entries, Obsolescence of Capital Assets

Disposal of Capital Assets

When capital assets become obsolete, wear out or become out-dated, or when an organization sells of a particular business unit, their capital assets are disposed off. Other capital assets are disposed off due to fire or permanent damage. Whatever the reason may be, we still need to account for disposal of capital assets and here is the 4 step process in doing so.

1) Record amortization expense up to the date of disposal. This also brings the Accumulated Amortization account up to date.

2) Remove the balance of the disposed capital asset account and related accumulated amortization account. Note we also state accumulated amortization because since the capital asset is disposed, so should any accounts related to it (including contra-asset accounts).

3) Record any cash or other assets that were received as a result of disposal.

4) Compare the asset’s book value with net amounts received at disposal or net amount paid out. Record any gain or loss resulting from this.

Discarding Capital Assets

As mentioned above, capital assets are disposed of when they become obsolete, useless and have no market value. As an introductory example, consider a company that disposes off a computer costing $3000 with an accumulated amortization of also $3000 on September 18th, 2008. This means the asset has been used up to its maximum useful life and salvage value, and the Net Book Value is $0. When accumulated amortization equals the asset’s cost, the asset is fully amortized and the entry to record this disposal is:

September 18th, 2008

Account Name

Dr. Accumulated Amortization, Computer System   $3,000  
  Cr. Computer System   $3,000
Entry to record disposal of $3,000 worth of a computer system.

This entry meets all of the requirements of the 4 step disposal process. Step 1 is not required as the computer is fully amortized. Step 2 is completed by Debiting Accumulated Amortization – Computer System and crediting the asset Computer System account and removing it off the balance sheet. Since the asset was disposed off for no cash, Step 3 does not apply. Also, since book value is $0 and no cash is involved, Step 4 is not necessary.

How do we account for an asset that is to be disposed of but which has not been fully amortized or whose amortization is not up to date? Consider a simulation system costing $10,000 with accumulated amortization of $6000 as of December 31st, 2008. This system is being amortized using the straight-line method at a rate of $2000/year amortization with no salvage value. The system is discarded as of April 30th, 2009. Step 1 is to bring amortization expense up to par. Thus, amortization expense as of April 30th, 2009 is:

Amortization Expense = $2000 / year x 4/12 = $667

Accumulated Amortization as of April 30th, 2009 = $6000 + $667 = $6,667

This next entry will reflect the required Steps 2-4 and account for the disposal.

April 30th, 2009

Account Name

Dr. Accumulated Amortization, Simulation System   $6,667  
Dr. Loss on disposal of system   $1,333  
  Cr. Simulation System   $8,000
Entry to record disposal of Simulation system at a $1,333 loss with an accumulated amortization of $6,667.

This loss on disposal is recorded in the Other Revenues & Expenses section of the Income Statement.




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