Eventually, plant assets need to be replaced.
The most-common reason are that they wear out
or they become obsolete or just become too costly
to continue to repair.
Generally there are three ways to dispose of plant assets.
The first is to scrap or retire an asset.
The second is to sell an asset.
The third is to trade or exchange
an old asset for a new one.
This video will focus on the accounting
for scrapping or retiring an asset.
When a company scraps or retires a plant asset,
it means that the asset is dumped, abandoned,
or thrown away.
This usually occurs when an asset is worthless
or cost of disposal is greater than the scrap value.
So when we dispose of a plant asset,
there are a few steps that we need
to do in order to make sure to make the proper journal entry.
The first step is to record depreciation expense as
of the scrap date.
It is unlikely that accumulated depreciation account has
the correct balance already.
Next, we need to remove the asset from our balance sheet.
We do this by zeroing out the plant
asset and the accumulated-depreciation
account.
Finally, we need to record any loss that occurs with disposal.
Let's look at the example.
Charlatans UK retires an old delivery truck
on January 1, 2018.
The truck's original cost was $40,000.
As of December 31, 2017, the total amount
of accumulated depreciation was $40,000.
So what is the journal entry to dispose of this asset?
Since this example occurs on the first day of the year,
let's assume that accumulated-depreciation
account has the correct balance.
Thus no additional depreciation needs to be recorded.
The T accounts show the $40,000 debit balance for truck
and a $40,000 credit balance for accumulated depreciation.
Once the truck is physically gone,
we need to remove it from our balance sheet.
So we need to zero out these two accounts.
The journal entry to do this is a debit
to accumulated depreciation and a credit to truck
in the amount of $40,000.
Once we post this journal entry, we
can see that the balance of these two accounts
are now zero.
Let's change this example slightly.
Let's assume that accumulated-depreciation
account balance is $35,000 as of December 31, 2017.
But now we're scrapping the truck on June 30, 2018.
Also note that I assume annual depreciation is
$5,000 per year.
At this point, you can see that accumulated-depreciation
account does not have the correct balance
because no depreciation has been recorded from January 1
through June 30, 2018.
So let's do that.
The adjusting entry to record depreciation expense
is a debit to the account depreciation
expense and a credit to the account accumulated
depreciation.
In this example, if the annual amount
of depreciation on this truck is $5,000,
we need to depreciate it for half a year.
Then the amount needed would be $2,500.
Once I've posted this journal entry,
you can see the new up-to-date balance in accumulated
depreciation is $37,500.
All right, so now let's record the journal entry to dispose
of this asset on June 30.
I think the simplest way to record disposal of asset
journal entries is to start with the accounts
and amounts you know.
In this case, we need to debit accumulated depreciation.
And the balance is $37,500.
This will remove accumulated depreciation from the books.
We also need to credit truck.
And its balance is $40,000.
This will remove truck from our books.
You can see that this journal entry doesn't balance.
We need a debit of $2,500 to make it balance.
In this case, we incurred a loss on the disposal of this asset.
Losses are like expenses.
They have normal debit balances and they reduce net income.
When the fair-market value of an asset
is less than the book value of an asset, then we have a loss.
The amount of loss is the difference
between the fair-market value and the book value.
But you can also plug the number needed to make this journal
entry balance.
So you could correctly arrive at a loss
of $2,500 for the disposal of assets either way.