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.
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:
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:
This next entry will reflect the required Steps 2-4 and account for the disposal.
This loss on disposal is recorded in the Other Revenues & Expenses section of the Income Statement.