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# How Do You Calculate The Gain Or Loss When An Asset Is Sold?

August 23, 2023
Bill Kimball

The asset received is recorded on the balance sheet at the book value of the asset given up plus any cash paid. A loss on disposal of a plant asset is reported in the income statement in financial statements.

A journal entry is recorded to increase depreciation expense and increase accumulated depreciation. Depreciation expense is reported on the income statement as a reduction to income. The increase in the accumulated depreciation account reduces the asset to its current book value. Compare the cash proceeds received from the sale with the asset’s book value to determine if a gain or loss on disposal has been realized. The gain or loss should be reported on the income statement. DateAccountDebitCreditSep-15Accumulated Depreciation\$5,600Cash\$2,000 Gain on disposal of equipment\$ 600 Equipment\$7,000To record disposal of equipmentThe journal entry is now in balance.

## Plant Assets And Depreciation

The financial statements are key to both financial modeling and accounting. In many cases, plant assets are sold rather than disposed of for no value in return. An asset can be sold during its useful life when it has a positive book value or at the end of its life when it is fully depreciated.

• Each year you reduce your income tax expense, by an amount relative to the cost recovery amount for that year.
• In this case, the cost of the new plant asset that the company exchanges the old asset for can be determined by the fair value of the old plant asset plus any amount of cash paid for the exchange.
• The credit of \$2,600 will result in the entry having debits of \$47,600 and credits of \$47,600.
• This is done in order to make the transaction appear more attractive to the buyer.
• For example, if it sold an asset on April 1 and last recorded depreciation on December 31, the company should record depreciation for three months (January 1-April 1).
• On March 31, a company sells its old delivery van for \$4,000.

The journal entry started with what we already knew – the cost and accumulated depreciation. We left 2 lines blank in the middle of the journal entry, so the sales price and gain or loss could be recorded. On the other hand, if the company makes a loss in exchange of plant assets, it can make the journal entry by debiting the loss amount to the loss on disposal of plant assets account.

A gain occurs if the cash or other assets received are greater than the asset’s book value at the time of sale. Disposal of plant assets can occur through the retirement of discarded assets, sales, involuntary conversions, or trade-ins. No matter how the disposal is accomplished, the accounting procedures are quite similar. You report gains on the sale of assets as non-operating income on your income statement. To measure the gain, subtract the value of the asset in your ledgers from the sale price. Also, if a company disposes of assets by selling with gain or loss, the gain and loss should be reported on the income statement.

Realized gains on the trade-in of assets for similar assets are not usually recognized as accounting gains. The cost basis of the new asset is the book value of the old, plus the additional cash or other consideration paid. Debit all accumulated depreciation and credit the fixed asset. For example, on June 1, the company ABC decides to exchange its old equipment for a new one in order to have a smoother operation in daily workflow. The net book value of the old equipment is \$30,000 which comes from the cost of \$50,000 less the accumulated depreciation of \$20,000. Furthermore, these examples assume that depreciation was recorded up to the date of the disposal of the delivery truck. However, in most cases, assets are sold or otherwise disposed of at various dates throughout the year.

## Are Credit Card Sales Considered Cash On A Cash Flow Statement?

For financial statement purposes, depreciation reflects a number of different influences that each affect an asset over its useful life. The cost of training the entire company’s personnel when a new computer system is installed would probably be a material amount, especially in a large company. Every employee might require a day’s training or more in the new system. The loss of productivity would be a material amount, and should be classified as part of the depreciable cost of the asset.

Any remaining difference between the two is recognized as either a gain or a loss. The gain or loss is calculated as the net disposal proceeds, minus the asset’s carrying value.

## Disposal Of Property, Plant Or Equipment

An asset disposal may require the recording of a gain or loss on the transaction in the reporting period when the disposal occurs. For the purposes of this discussion, we will assume that the asset being disposed of is a fixed asset. In the business, the company may across a situation where it needs to exchange the old plant assets for the new one instead of just buying a new one. Non-monetary assets are not easily converted to cash, such as equipment. An exchange between non-monetary assets should be analyzed to determine if the exchange has commercial substance. An asset exchange with commercial substance will cause future cash flows to materially change.

If the cash received is greater than the asset’s book value, the difference is recorded as a gain. If the cash received is less than the asset’s book value, the difference is recorded as a loss. Involuntary conversion of assets can involve an asset exchange for monetary or non-monetary assets. The cost of training may be considered part of the depreciable cost, it the amount is material to the purchase of the asset. A brief training session for one or two machine operators will probably be an immaterial amount. The company ABC’s agent has determined that the old equipment has a fair value of \$25,000 at the time of exchange. Also, in exchange for the new equipment, the company ABC pays \$20,000 in addition to the old equipment.

Since the \$4,000 of cash received by the company was greater than the van’s book value of \$1,400, there is a gain on the sale of the van of \$2,600 (\$4,000 minus \$1,400). The gain or loss on the sale of an asset used in a business is the difference between 1) the amount of cash that a company receives, and 2) the asset’s book value at the time of the sale. At first, it may seem strange that a realized gain is not recognized in the accounting records. The APB felt that revenue should not be recognized merely because one productive asset is exchanged or substituted for a similar one.

Unlike a voluntary sale, involuntary conversion of assets can involve an asset exchange for monetary or non-monetary assets. At the time of disposal, depreciation expense should be recorded to update the asset’s book value.

Other assets, and other expenditures which meet the criteria. An asset must be removed from the books due to unforeseen circumstances (e.g., theft). Thus, a cash payment of \$51,000 (\$65,000 — \$14,000) is made for the difference. Dealers such as automobile companies often set an unrealistically high list price in order to offer the customer an inflated trade-in allowance. This is done in order to make the transaction appear more attractive to the buyer.

## Journal Entries For Asset Disposals

For example, suppose you purchase a \$7,000 piece of equipment for your company’s biochemistry lab and sell it for \$5,500 down the road. That looks like a \$1,500 loss, but that may not be the case. What you subtract from the sale price isn’t the purchase price but the asset’s carrying amount. When assets are purchased, the cost is reflected in the Balance Sheet. Depreciation expense transfers that cost to the Income Statement in order to reflect the effect of the items listed above, in the financial statements. In this case, the cost of the new plant asset that the company exchanges the old asset for can be determined by the fair value of the old plant asset plus any amount of cash paid for the exchange. The balance sheet is one of the three fundamental financial statements.

Suppose, we have received \$50m cash in consideration of the disposal. This amount will appear in our Ledger Balance the next day. For Federal Income Tax purposes, depreciation is referred to as cost recovery. The government allows you to use the cost of plant assets to offset income. You recover your cost a little bit at a time, over a number of years. Each year you reduce your income tax expense, by an amount relative to the cost recovery amount for that year. It’s a slightly strange concept if you’re not involved in preparing income taxes.

When depreciation is not recorded for the three months, operating expenses for that period are understated, and the gain on the sale of the asset is understated or the loss overstated. For non-monetary asset exchanges without commercial substance, the expectation is that the exchange will not materially alter future cash flows. This type of exchange usually involves like-kind property, such as exchanging a truck for another truck.

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Loss from Fire6,000Accumulated Depreciation—Buildings 12,000Buildings 40,000To record fire loss and amount recoverable frominsurance company. •Recording any consideration received or paid or to be received or paid.

## Boundless Accounting

If the proceeds are more than book value, the result is a gain. The proceeds from the sale will increase cash or other asset account. Depending on whether a loss or gain on disposal was realized, a loss on disposal is debited or a gain on disposal is credited. The involuntary conversion of an asset occurs when an asset must be disposed of due to unforeseen circumstances, such as theft, casualty, or condemnation. The forced disposal of the asset may result in cash proceeds from the filing and payment of an insurance claim on the asset or the receipt of a casualty award. If the monetary exchange is more than the asset’s book value, updated for depreciation up to the disposal date, a gain on disposal results; if the proceeds are less, the disposal realizes a loss.

Conversely, if the trade-in allowance is less than the asset’s book value, a loss will occur. DateDescriptionDebitCreditBalanceSep-1Balance forward\$5600(\$5600)Sep-15Disposal of asset\$5600\$0The asset and related accumulated depreciation have both been removed from the books. Usually, at this point, students are a showing a slight glaze over their eyes. I then reiterate that depreciation expense reduces income, which in turn cuts income taxes. Cutting our taxes, that’s something most of us can relate to.

All these things should be included in the journal entry recording the disposal. After selling or disposing of fixed assets, the company no longer has the asset.