Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 9 Fixed Assets and Intangible Assets 411

value of the asset is removed from the accounts. The entry to record the disposal of a

fixed asset debits the asset’s accumulated depreciation account for its balance on the

date of disposal and credits the asset account for the cost of the asset.

If the asset is still used by the business, the cost and accumulated depreciation

remain in the ledger. This maintains accountability for the asset in the ledger. If the

book value of the asset is removed from the ledger, the accounts contain no evi-

dence of the continued existence of the asset. In addition, the cost and accumulated

depreciation data on such assets are often needed for property tax and income tax

reports.

Discarding Fixed Assets

When fixed assets are no longer useful to the business and have no residual or market

value, they are discarded. To illustrate, assume that an item of equipment acquired at

a cost of $25,000 is fully depreciated, with no residual value at December 31, the end

of the preceding fiscal year. On February 14, the equipment is discarded. The entry to

record this is as follows:

If an asset has not been fully depreciated, depreciation should be recorded prior

to removing it from service and from the accounting records. To illustrate, assume that

equipment costing $6,000 is depreciated at an annual straight-line rate of 10%. In ad-

dition, assume that on December 31 of the preceding fiscal year, the accumulated de-

preciation balance, after adjusting entries, is $4,750. Finally, assume that the asset is

removed from service on the following March 24. The entry to record the depreciation

for the three months of the current period prior to the asset’s removal from service is

as follows:

The discarding of the equipment is then recorded by the following entry:

The loss of $1,100 is recorded because the balance of the accumulated depreciation ac-

count ($4,900) is less than the balance in the equipment account ($6,000) which repre-

sents the undepreciated portion of the discarded asset. Losses on the discarding of

fixed assets are nonoperating items and are normally reported in the Other Expense

section of the income statement.

Feb. 14 Accumulated Depreciation 25,000

Equipment 25,000

Mar. 24 Depreciation Expense—Equipment 150

Accumulated Depreciation—Equipment 150

To record current depreciation on equipment

discarded ($600  123 – ).

Mar. 24 Accumulated Depreciation—Equipment 4,900

Loss on Disposal of Fixed Assets 1,100

Equipment 6,000

SCF BS IS

—AcT SET Ec

SCF BS IS

—AT SET Ec

SCF BS IS

—ATc —