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Journal Entry for Disposal of Asset Not Fully Depreciated

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In the world of accounting, the disposal of an asset is a common occurrence. However, things get a bit more tricky when the asset has not been fully depreciated or is still in use. This article will walk you through the concept and provide three examples to help you understand the journal entry for such a disposal.

Steps to Record the Disposal of an Asset Not Fully Depreciated

Disposal of assets can occur from sale, trade-in, write-off, or scrapping. When disposing of an asset before it is fully depreciated, the business must remove its cost and accumulated depreciation from the books, and recognize any gain or loss on the disposal.

Step 1: Gather the net book value of the asset

This is calculated by subtracting the accumulated depreciation from the asset’s original cost. For instance, if the original cost of an asset is $10,000, and it has already depreciated by $6,000 (accumulated depreciation), then the net book value is $4,000

Step 2: Calculate Gain or Loss on the disposal

If the asset is sold, the gain or loss is the difference between the sale proceeds and the net book value. 

Using the same example:

  • If the sales proceeds are $5,000, the gain is $1,000 ($5,000 sales proceeds – $4,000 net book value). 
  • If the sales proceeds are $2,000, the loss is $2,000 ($2,000 sales proceeds – $4,000 net book value). 

If the asset is written off, scrapped, or not sold, a loss is recognized as the same amount as the net book value. Tip: Treat it the same way as selling the asset for $0.

Using the same example:

  • If the asset is disposed of and not sold, then the loss is $4,000, which is the same as the net book value.
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Journal Entry for Disposal of Asset Not Fully Depreciated

We will list three scenarios. 1) Asset sold with a loss, 2) Asset sold with a gain, and 3) Asset not sold but scrapped or written off.

Scenario 1: Asset sold with a loss

Pho My Life (PML) Noodle Shop has sold a piece of kitchen equipment that was not fully depreciated

  • Equipment original cost: $10,000
  • Accumulated depreciation: $8,000
  • Sales proceeds: $500

Calculation needed:

Net book value: $2,000 ($10,000 original cost – $8,000 accumulated depreciation)

Loss on sale: $1,500 ($500 sales price – $2,000 net book value)

Journal Entry

Journal Entry for Disposal of Asset Not Fully Depreciated - Asset sold with a loss

This entry:

  • Removes the cost of equipment from the book by crediting the Kitchen Equipment (fixed assets account) for $10,000
  • Removes the accumulated depreciation of the equipment by debiting the Accumulated Depreciation account for $8,000. Note the account is a contra-asset account, therefore its normal balance is credit.
  • Records the cash received by debiting Cash for $500
  • Recognizes the loss incurred from the disposal by debiting the Loss on Disposal account for $1,500
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Scenario 2: Asset sold with a gain

Pho My Life (PML) Noodle Shop has sold a piece of kitchen equipment that was not fully depreciated

  • Equipment original cost: $10,000
  • Accumulated depreciation: $8,000
  • Sales proceeds: $3,000

Calculation needed:

Net book value: $2,000 ($10,000 original cost – $8,000 accumulated depreciation)

Gain on sale: $1,000 ($3,000 sales price – $2,000 net book value)

Journal Entry

Journal Entry for Disposal of Asset Not Fully Depreciated - Asset sold with a gain

This entry:

  • Removes the cost of equipment from the book by crediting the Kitchen Equipment (fixed assets account) for $10,000.
  • Removes the accumulated depreciation of the equipment by debiting the Accumulated Depreciation account for $8,000. 
  • Records the cash received by debiting Cash for $3,000.
  • Recognizes the gain incurred from the disposal by crediting the Gain on Disposal account for $1,000.
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Scenario 3: Asset not sold

Pho My Life (PML) Noodle Shop has scrapped a piece of kitchen equipment that was not fully depreciated. It is not sold but written off or thrown into the trash alley.

  • Equipment original cost: $10,000
  • Accumulated depreciation: $8,000

Calculation needed:

Net book value: $2,000 ($10,000 original cost – $8,000 accumulated depreciation)

Loss on disposal: $2,000. Same as the net book value.

Journal Entry

Journal Entry for Disposal of Asset Not Fully Depreciated - Asset not sold

This entry:

  • Removes the cost of equipment from the book by crediting the Kitchen Equipment (fixed assets account) for $10,000.
  • Removes the accumulated depreciation of the equipment by debiting the Accumulated Depreciation account for $8,000.
  • Recognizes the loss incurred from the disposal by debiting the Loss on Disposal account for $2,000. Note that the loss is the same as the net book value if the asset is not sold.
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Key Takeaways

  • Disposal of an asset that is not fully depreciated requires removing the asset’s cost and accumulated depreciation from the accounting records and recognizing any resulting gain or loss.
  • The net book value, calculated as the asset’s cost minus its accumulated depreciation, is essential in determining the financial outcome of the disposal.
  • When an asset is sold, a gain is recorded if the sale proceeds exceed the net book value, while a loss is recognized if the proceeds are less than the net book value.
  • If the asset is not sold but written off or scrapped, a loss equivalent to the net book value is recorded. Tip: It’s comparable to selling the asset for $0.

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