Retirement of Plant Assets (No Proceeds) - Online Tutor, Practice Problems & Exam Prep

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)

So let's discuss what happens when we take a fixed asset that we've used for a long time, we fully depreciate it and now it's finally time to retire it. We're taking it off of our books because we're no longer going to use it. But one thing I want to note is that sometimes we'll have a fully depreciated asset, but we'll keep using it because the useful life we estimated for this asset might work longer than expected. We might use it for many years after that and during those years, we're not going to keep depreciating it. We don't take any more depreciation expense. Remember, the useful life that we came up with is an estimate. The company estimated the useful life and it might end up working longer. So when it finally does come time to dispose of that asset, we can dispose of the fully depreciated asset for no money by just taking that machine and saying: "Hey, you had a good run, buddy," and throwing it in the dumpster behind the factory.

This retired asset, it's either going to have no salvage value where we never estimated that it would be worth anything at the end, or it could have a salvage value. Let's focus here first on a situation where it has no salvage value. When we first estimate the depreciation, we need three variables: Cost, useful life, and residual or salvage value. If we had estimated that it would have no salvage value, then once we're done depreciating the asset, the net book value of the asset is going to be 0 because it had no salvage value.

Let's look at an example. On April 1, 2009, the company decides to dispose of a fully depreciated asset. The asset was originally purchased for $80,000 and was depreciated using the straight-line method over the past 10 years with no salvage value. So once it's fully depreciated, the net book value will equal 0 because the salvage value is 0. The equipment account where we had this asset had a purchase value of $80,000, and the accumulated depreciation account is going to have a credit balance of $80,000. To get this off of our books, we need to reverse these numbers. We debit our accumulated depreciation for the full $80,000, which removes the accumulated depreciation, and we credit the equipment for $80,000 as well. These actions cancel out and there's nothing left there. We've cleaned out our books, and there's no more equipment or accumulated depreciation related to this asset on our books.

So this is how we would retire this asset by getting rid of its position in the books. Even though nothing really happened financially since the net book value was 0 and it wasn't increasing our assets, it was sitting there and there's no reason to have it on our books if we don't own it anymore. We're getting it off our books. Our accumulated depreciation went up by $80,000 because it had a credit balance and we've debited $80,000, but then our equipment went down by $80,000. So really nothing happened. Our assets stayed at the same balance, we just got it off our books. This is more of like a technical entry just to clean up our books and make sure that everything is in order.

Let's pause real quick and then we'll talk about what happens when an asset had a salvage value, but we got no proceeds when we disposed of it in the next video.

Retirement of Fixed Assets (with Salvage Value)

All right, so when an asset does have a salvage value, what's going to be the asset's net book value once it's fully depreciated? Once we have fully depreciated the asset, the net book value is equal to the salvage value. They are going to equal each other, and that should make sense from all our depreciation examples. Once we were done depreciating, what was left in the net book value? It was that salvage value, the residual value. Let's check out this example.

On April 1st, 20x9, the company decides to dispose of a fully depreciated asset. The asset was originally purchased for $80,000 and was depreciated using the straight-line method over the past 10 years with a $6,000 salvage value. However, the company received no proceeds from the disposal of the asset.

At first, they estimated they were going to get $6,000, so their depreciation expense prorated for that amount to make sure that at the end there would be a $6,000 net book value. But now, they said, hey, nobody actually wants to buy it. They took the machine, threw it in the dumpster, and got no money for it, right? So that $6,000 salvage value, unfortunately, they don't get it.

Let's go ahead and look at our T accounts for our equipment and for our accumulated depreciation. Our equipment would have had an $80,000 balance, right? An $80,000 balance in our equipment account, but what about our accumulated depreciation? When we fully depreciated it, well, it didn't reach the full $80,000, right? There was still $6,000 in net book value, so the $80,000 minus the $6,000 in salvage value comes out to $74,000, and that's the amount of accumulated depreciation that was on our books after those 10 years of depreciating the asset.

We would have had this credit balance of $74,000, and that should make sense, right? If we had a debit of $80,000 in our equipment and a credit of $74,000 in our accumulated depreciation, well the net book value of the two is that $6,000 salvage value. Alright? So now we got to get this off of our books. We already threw it in the dumpster; now it's the accountant's turn to put it in the dumpster as well.

Let's go ahead and make our journal entry here to get rid of these accounts. The first thing we need to get rid of, well, let's do it our debit. The accumulated depreciation has to go, right? There's nothing we got rid of the asset, so we have to get rid of the accumulated depreciation for it. So we're going to debit accumulated depreciation, and that's going to be a debit of $74,000 because we got to get that off of our books. And then we're going to credit equipment, right? Equipment has to be credited to get rid of that off of our books, but that was for $80,000, because it had an $80,000 value.

This doesn't balance, right? There's a $6,000 difference between the two. Well, it's time to write off the rest of that value. We still had this net book value of $6,000. We threw it in the dumpster. We threw away these $6,000 that we thought we were going to get, what we were never actually going to get them. Maybe we should have made a better estimate and estimated, hey, actually, we were going to get no salvage value, but we couldn't have known better at the time. Maybe we thought it was going to be worth $6,000 and today, all of a sudden, it was just not worth anything when we tried to sell it.

What we need to do is take a loss, a loss on disposal or loss on retirement of the asset, and it's going to be a debit. Losses are similar to expenses except these are one-time things that happen from some certain event. An expense, well we got some benefit from that. With a loss, which is similar to an expense, or we can have a gain that's similar to a revenue, right?

In this case, we have a loss on the disposal of this asset, and it's going to be for those $6,000 in salvage value that we never recovered. This loss is going to our income statement. We would have this under our operating section, with our revenues from operations, cost of goods sold, and then we would have all our operating expenses. Beyond that, we would get to other income and other expenses. And this is where that loss on disposal would show up, in that other section. Cool?

We got rid of our equipment; our equipment went down by $80,000. Our accumulated depreciation went up by $74,000, that should make sense that it went up because it had a contra asset account, but as an asset, assets go up with debits. So the asset value really went up by $74,000 in that camp. But the assets, in total, the net book value went down because of that $6,000 loss and that $6,000 is going to our income statement. So it's going to show up over here in our equity, right? Because all of our losses go through the income statement and our net income goes to equity through retained earnings. So it still balances out, our assets went down by $6,000, our equity went down by $6,000. Alright?

So there's our journal entry, and why don't you guys go ahead and practice a problem related to an asset retirement? Let's try that now.

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

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.