Retirement of Plant Assets (No Proceeds): Videos & Practice Problems

When disposing of a fully depreciated asset, if it has no salvage value, the net book value is zero. For example, an asset purchased for $80,000 and fully depreciated will have its accumulated depreciation account debited and the equipment account credited by the same amount, effectively removing it from the books. If the asset has a salvage value but no proceeds are received, a loss equal to the salvage value must be recorded. This loss impacts the income statement, reducing net income and equity.

Retirement of Fixed Assets (No Salvage Value)

When a company decides to retire a fully depreciated asset, it is important to understand the accounting implications of this action. A fully depreciated asset is one that has reached the end of its estimated useful life, meaning its net book value is zero. This situation arises when the asset has been depreciated to its estimated salvage value, which can sometimes be zero. The useful life of an asset is an estimate, and in some cases, the asset may continue to be used beyond this period without further depreciation being recorded.

In the case of disposing of a fully depreciated asset with no salvage value, the accounting entries are straightforward. For example, consider an asset that was originally purchased for $80,000 and depreciated over ten years using the straight-line method, resulting in a net book value of zero. When the asset is retired, the company must remove both the asset and its accumulated depreciation from the books.

The accounting entries to retire the asset involve debiting the accumulated depreciation account and crediting the equipment account. In this scenario, the accumulated depreciation account, which reflects the total depreciation taken on the asset, would be debited for $80,000. Simultaneously, the equipment account would be credited for the same amount, effectively removing the asset from the company's financial records. This process ensures that the company's books remain accurate and free of clutter from assets that are no longer in use.

After these entries, the total assets of the company remain unchanged, as the increase in accumulated depreciation is offset by the decrease in the equipment account. This technical entry serves to clean up the financial statements, ensuring that they accurately reflect the company's current asset holdings.

In summary, retiring a fully depreciated asset with no salvage value involves straightforward accounting entries that maintain the integrity of the financial records. Understanding this process is crucial for effective asset management and financial reporting.

Retirement of Fixed Assets (with Salvage Value)

When an asset has a salvage value, its net book value upon full depreciation equals the salvage value. This concept is crucial in understanding asset disposal and depreciation accounting. For instance, consider a scenario where a company disposes of a fully depreciated asset originally purchased for $80,000, depreciated over 10 years using the straight-line method, with an estimated salvage value of $6,000. However, if the company receives no proceeds from the disposal, the asset is effectively written off without any recovery of the salvage value.

Initially, the accumulated depreciation would be calculated as the original cost minus the salvage value, resulting in $74,000 ($80,000 - $6,000). This amount reflects the total depreciation taken over the asset's useful life. When the asset is disposed of, the journal entry to remove the asset from the books involves debiting the accumulated depreciation account for $74,000 and crediting the equipment account for $80,000. This entry eliminates both the asset and its accumulated depreciation from the financial records.

However, since the asset was disposed of without any recovery, a loss on disposal must be recorded. This loss, amounting to the salvage value that was not realized ($6,000), is debited to a loss on disposal account. Losses are treated similarly to expenses but are one-time events resulting from specific transactions. This loss will appear in the income statement under the operating section, affecting the overall equity of the company.

In summary, the disposal of the asset results in a decrease in total assets by $6,000 and a corresponding decrease in equity, as the loss impacts retained earnings. This process illustrates the importance of accurately estimating salvage values and understanding the implications of asset disposal on financial statements.

A company using the double-declining-balance method for recording depreciation has a fully depreciated asset with a salvage value of $8,000. The asset originally cost the company $62,000. If the company retires the asset in the current year for no proceeds, the journal entry to record the disposal would include:

• A. A debit to Accumulated Depreciation for $62,000
• B. A debit to Depreciation Expense for $8,000
• C. A credit to Equipment for $8,000
• D. None of the above

Answer: (D)

Here’s what students ask on this topic:

What happens to the net book value of a fully depreciated asset with no salvage value when it is retired?

When a fully depreciated asset with no salvage value is retired, its net book value is zero. This is because the asset's cost has been completely offset by accumulated depreciation. To remove it from the books, you debit the accumulated depreciation account and credit the equipment account by the same amount. This effectively clears the asset and its related depreciation from the financial records, ensuring the books are accurate and uncluttered.

How do you record the retirement of a fully depreciated asset with no salvage value in the journal entries?

To record the retirement of a fully depreciated asset with no salvage value, you need to make the following journal entries: Debit the accumulated depreciation account and credit the equipment account by the asset's original cost. For example, if the asset was purchased for $80,000 and fully depreciated, you would debit accumulated depreciation for $80,000 and credit equipment for $80,000. This removes both the asset and its accumulated depreciation from the books.

What is the impact on the income statement when an asset with salvage value is retired with no proceeds?

When an asset with salvage value is retired with no proceeds, a loss equal to the salvage value is recorded. This loss is reported on the income statement under the 'Other Expenses' section. For instance, if an asset had a salvage value of $6,000 but no proceeds were received, a $6,000 loss on disposal is recorded. This loss reduces net income and, consequently, equity through retained earnings.

How do you handle the accumulated depreciation and equipment accounts when retiring an asset with salvage value but no proceeds?

When retiring an asset with salvage value but no proceeds, you debit the accumulated depreciation account for the amount depreciated and credit the equipment account for the asset's original cost. Additionally, you record a loss for the salvage value. For example, if an asset originally cost $80,000, had $74,000 in accumulated depreciation, and a $6,000 salvage value, you would debit accumulated depreciation for $74,000, credit equipment for $80,000, and debit a loss on disposal for $6,000.

Why is it important to remove fully depreciated assets from the books?

Removing fully depreciated assets from the books is important for maintaining accurate and uncluttered financial records. Even though the net book value is zero, keeping these assets on the books can mislead stakeholders about the company's actual asset base. By removing them, you ensure that the financial statements reflect only the assets currently in use, providing a clearer picture of the company's financial health.