 In this presentation, we'll work a few problems related to the disposal of property plant and equipment. We'll start off with the most simple kind of disposal and then we'll add some components and some complexity as we move forward. We will enter the data into this blue area. This is where the journal entry will be. We'll then post it not to the general ledger out just to this worksheet. So we're going to post it to the center column, which will give us a quick view of the effect on the assets, the liabilities, the equity, the fact that we're still in balance and net income. So a worksheet like this is perfect when we just have a few journal entries. So let's see what we have. Equipment is fully depreciated and no cash is received. So in this case we're going to dispose of this equipment and it has been fully depreciated. The nicest thing to be able to have when working a problem like this is to have the trial balance in front of you. Now when you work problems and book problems, they often won't have that. They'll have to give you the information in some way. But if you can see the actual trial balance, it's best because you can see here's the equipment, has a debit balance, here's the accumulated depreciation, it has a credit balance. In this scenario, all we're doing is saying it's been fully depreciated and now we're getting rid of it. We're actually disposing of it in some way and therefore need to take it off the books. Be aware that one, it's not necessarily the case that if it's fully depreciated, meaning it has a book value of zero, the value of the equipment minus the accumulated depreciation is zero. That doesn't mean that the company's not still using it. We still may have it, we still may use it and therefore we shouldn't take it off the books unless we do use it. And to note that there's no salvage value here, we can tell that because we took it down to the full amount here. We didn't leave any scrap metal so we're not going to be collecting anything on it and we took it down to zero in terms of the calculation for depreciation. Also recognize that in this problem, we're just going to say this is the only piece of equipment. It's $110,000 piece of equipment. We're going to put it on the books, take it off the books. In a real life situation, we would typically have one equipment account which would have be representing multiple pieces of equipment and then go to a subledger to remove the piece of equipment we are particularly looking at. Here we want to be able to see it and I want to see it directly, this one piece of equipment being represented in this account to be taken off the books, but just be aware of that the process would be the same. However, we would have a subledger that would list out all the components of property plants and equipment and then we would just take out the components related to the piece of equipment we're talking here. We are going to here say that this is the one piece of equipment we're going to be removing from the books which costs $110,000, had accumulated depreciation of $110,000. So we got to remove this from the books, the equipment's on the books with an asset and a debit balance. We need to make it go off the books so we're going to do the opposite thing to it which is a credit. So I'm just going to copy the equipment account, right click and copy. I'm going to put it on the bottom so it's going to be our journal entry. I'm going to put it on the bottom in B6 and right click and paste 123. Then the amount's going to be a credit. I'm going to make that a negative for our journal entry, $110,000. Then we're going to need a debit of the same amount. I'm going to put that in a formula context here by saying negative of this number. We could just type it in there, but I'm going to say negative of that number flipping the sign. And then the other side of course will be accumulated depreciation. So here's accumulated depreciation has a credit balance. We need to take it off the books because the account it relates to equipment has been removed. So it has a credit. We're going to do the opposite which is a debit. So we're going to copy that, put that in B5, right click and paste 123. So here's our journal entry for the removal, the disposal, the most straightforward type of journal entry if we're disposed of it. We're not getting any cash for it and it's been fully depreciated down to zero. Let's post this out and see what happens. If we go to the accumulated depreciation in H8, we will say equals and then point to the accumulated depreciation in C5 and it'll take the credit balance of $110,000 down in the debit direction by $110,000 to zero. Of course, we're out of balance by $110,000. Now we're going to post the other side to equipment in H7. So within H7, we're going to say equals and point to the $110,000 credit, bringing the balance down from $110,000 by $110,000 to zero. So it's achieved our goal of bringing us down to zero, this representing that one piece of equipment that's been fully depreciated. Note what didn't happen, no effect on net income, net income being revenue minus expenses. We don't have any revenue expense accounts here because we had already expensed the equipment in depreciation and it's fully depreciated at this point in time. So we've already allocated the cost to the periods to allocate them to. We can't allocate any more costs because it's already fully depreciated, already at zero. So let's take a look at another scenario down here. We're going to say now the equipment is fully depreciated, but we got $500 and received at the disposal. So now we dispose of this piece of equipment, but we got $500 just basically scrap for the disposal process. In that case, we're going to do the same type of thing. We're going to go over here and say, well, is cash affected? That'll be our first thought process. We're going to say, yeah, we got cash. Cash is a debit balance. It's going to go up. So we'll do the same thing to it, another debit. So it's just like any other transaction would probably want to take a cash first. And if it's affected, then we can do that really easily and say that cash, we know that's part of our journal entry. And then the second part is just what we had before. We know that we need to take the equipment off the books. We know that we need to take accumulated depreciation off the books. And they're fully depreciated, meaning equipment minus the accumulated depreciation adds up to zero. It's been fully depreciated. So we're going to take those two off the books. So I'm going to take the accumulated depreciation. Let's do that first, because it's going to be a debit. So it has 110,000 credits, we need to take it off the books with a debit. So we'll do the opposite thing to it, a debit. Now note, if you don't have the trial balance in front of you, it's often easy to forget about the accumulated depreciation or get confused on which way it will go. But just note, it's of course the opposite of the equipment account. So I'm going to copy this, we're going to put that in B24, right click and paste 123. The amount's going to be for 110,000. Then we're going to have the credit and that credits going to go to equipment, we got to bring the equipment down to zero. So we're going to do the opposite thing to it, in this case, a credit. So we'll copy the equipment, right click and copy. We're going to put that in B25, right click and paste 123. We could indent that, go into the home tab, alignment, increase indenting, and that's going to be for a credit of 110,000. Now that accounts for everything that we have information on. It has the cash we got, it takes the equipment off the books as well as the accumulated depreciation. However, we're not in balance, the debit's add up to 110.5, credits only add up to 110. We have an added 500 on the debit side, we need another 500 on the credit side. So to make us in balance, I call this the plug formula would be negative sum of, and then we'll add up these cells. So it's going to be 500, of course, it would be this plus this minus this, but we want it to be a credit. So I put a negative in front, and that'll be 500. Now if we highlight the whole thing, it adds up to zero, meaning the debits minus the credits add up to zero. Now we just need to know what account to put this 502. And this is often a pretty confusing component when we're first learning this because it's a credit and it represents a gain or a loss, of course, because it's got to be an income statement account because when we it's almost like a sale hat when we pretty much sold it, we sold the scrap here. And if you think about it, we sold it for 500. And the cost of it was pretty much zero. It's this minus this it has it's been fully depreciated. It's not on the books for anything anymore, we already expensed it all. So it costs pretty much zero. So that must be a gain then. And some people it can be confusing because it's a credit. And we just need to remember that a credit is kind of good on the income statement, the income or revenue or credit balance accounts, whereas the expense accounts are debit balance accounts. So we actually kind of like credits on the on the income statement. So I'm going to call it gain loss on disposal. So this account then is going to be used whether it's a gain or a loss the way we have it here, we may have two accounts in some cases, one for the gain on disposal one for a loss on disposal, this one's going to have a gain if it's a credit, a loss if it's a debit. In this case, it's a credit should increase net income. I'm going to copy this right click and copy, put that in B 26 right click and paste 123. Then we'll increase the indenting go into the home tab alignment, increase indenting. And then let's let's post this one. So in H 23, we'll post the cash by saying equals and point to that 500 bringing the 500,000 up by 500 to 500,000 500. Then the accumulated depreciation here is going to be posted here in H 26, where we will say equals and point to the 110 debit bringing this balance down to zero. Then we'll go to the equipment account in H 25. So we're posting this on the general journal here to our worksheet in H 25 equals pointing to that 110 and enter, bringing that down to zero. Last one, we're going to have the gain or loss on disposal that 500. We're going to put that down in H 33 by saying equals pointing to that 500 that should bring the zero balance up by 500 to 500. That puts us back in balance here. We do have an effect on net income. It went from 66,000 credits winning. That means income it's net income to 66,500. At least it would if the formulas were working here. So here's the 66,000. It's going up by 500 to the 66,500. So that's the revenue minus the expenses. This is a form of revenue. So it's increasing the net income. Now we're going to go down to the next example here. And we're going to say now we got no cash. It's five year useful life property. No salvage value. It is disposed of in the middle of year five. So what we're saying now here is we have this depreciation, accumulated depreciation, but it's not fully depreciated. And if that's the case, then we got to make sure that we depreciate it up to the point of sale because depreciation is an adjusting entry process. And we may only do it every month or every year. And therefore if it's not the end of the month or the end of the year, it may not be fully depreciated at the point in time that we sell it. And so we have to record whatever depreciation has passed to the point in time that we sell. And then we can go through our sales process. So in this case, we're going to say that the cost, we're going to calculate the depreciation, and we're going to figure out that component that hasn't been depreciated yet. So it's going to be straight line method, we're just going to take the cost 110,000 useful life said it was five years. If we divide that out, we're going to say 110 divided by five. So it should be 22 a year. And what we're saying it was it was it was the middle of year four. So if I look here, we've got 88,000. So if I took 88,000 divided by 22,000, it's been depreciated over four years. And we're selling it in the middle of the fifth year. So it should have half another year to depreciate. So we need to add half a year of depreciation before we dispose of it. So we're just going to divide this by two, and then say this equals the 22 divided by two. And that should give us our 11,000. So once again, the straight line method, we just took the cost divided by the useful life gives us the depreciation per year, we had one half a year not yet depreciated divided by two, that gives us our 11,000 that we need to record as depreciation before we then dispose of the equipment or record the disposing. So it's going to be our normal adjusting journal entry to do that. And that's going to be accumulated depreciation going up and depreciation expense. And you kind of just want to have this one memorized. So depreciation expense, it's an adjusting journal entry depreciation expense on the income statement, and depreciated depreciation on the balance sheet, expenses only go up typically. So we're going to increase it by doing the same thing to it, another debit. So I'm going to copy the depreciation expense here, we'll put that up top, paste it 123 for our, I'm just going to say equals this 11,000 we calculated. Then I'm going to put a credit for, I'm going to use a negative of that number gives us a credit of 11,000. And that's going to go to accumulated depreciation. So we'll copy accumulated depreciation right click, copy, put that in the beat 43 right click and paste 123. And that'll give us our information there for our first journal entry. So let's record this first and then keep moving forward. So we'll record the depreciation. So I'm going to go down here in H 51, and say equals and point to that 11,000, bringing the depreciation up to 11,000, and bringing our net income down by 11,000. The next piece will go to accumulated depreciation in H 45. So we're going to say in H 45, this equals and point to that 11,000 bringing the balance up from 88,000 by 11,000 to 99,000. So now we can see that there was an effect on net income, and we have 99,000 in accumulated depreciation. The book value then is 110,000 minus 99,000 or 11,000, which is a half of another year of depreciation left. So we've got 11,000 left, that's the book value. Now, in this one, we're saying we didn't get any cash for it, we just disposed of it before it was fully depreciated, and we didn't get any scrap for it or anything. So I'm going to make another journal entry is cash affected, we're going to say no. And then just go through our normal process to get this equipment off the books, meaning we have equipment on the books, we need it to go down. So I'm going to do the opposite thing to it. So I'm going to copy that. It's a debit, we're going to credit it. I'm going to skip a line for a new journal entry and skip another line to put it on the bottom, right click and paste 123. That's going to be a credit. I'm going to put a negative of 110,000. We can indent it, go into the home tab, alignment, increase in denting. Then the accumulated depreciation needs to go off the books too. If we have our worksheet, we can see here, okay, it's 99,000 that we need to make go to zero. If you're working a book problem and you don't have the sheet here, the excel, the trial balance, then you'd have to, it would have to tell you that it's 88,000 and then you'd have to add the 11,000 for our journal entry to note that it's now at 99,000 in some way. You might use T-accounts to do that, but that's what we'd have to track. That's why it's best. It's nicest to actually see a trial balance. If you don't have one in front of you, it's good just to use another trial balance just to note that it is a credit balance account and put it into context. So even if you don't have the same numbers, it could be useful to look at. Then I'm going to copy this accumulated depreciation, put that on top, B45, right-click and paste, 1, 2, 3. The amount will be 99,000. Then we've got a difference of course. We're out of balance here. We're going to need a debit in this case of, what is that? That's our 11,000 of course. If we highlight it instead of trying to, we have the 11,000 here and then we're going to do that with our negative plug formula. Now we know that it's going to be a debit because the debits are losing here. So we need a debit. So we'll put it in C47. I'm going to put a negative SUM, use it in our plug formula, double-click the SUM function and highlight from the 99 down to the 110. Now this is going to be a debit and it's also often confusing once again to say, well, is that a gain or a loss? And if you look on it, it's a debit and it's on the income statement. And so that means it's going to be kind of like acting as an expense, which will bring down that income like a loss will. The other way we can kind of see it's a loss is that of course, if we looked at the equipment, it still had value meaning it still has an depreciated amount of 11,000. The book value is 110 minus the 99. If it had a book value of 11,000 and we didn't get any money for it and we got zero cash, then that would mean it's going to be a loss. So we're going to go back over here. It's going to be in the gain loss account. In this case, it's going to be a loss, a debit. I'm going to copy that. I'm going to put that over here and B47, right-click and paste. 123. Now note this is a little out of order. I think this is the easiest way to construct this journal entry. And that's why I'm going to leave it this way. But if it's getting picky in terms of the formatting, you might want to then change and put the debits on top. If you keep it in this format, I think it might be easier to go back and look and say, what did I do? Why did I do it? How did I construct this journal entry? So those are the pros and cons between putting the debits on top or leaving it in whatever structure you think will help you to one construct it to go back and look at it and see what you did. Okay, so then we're going to say accumulated depreciation and post that that's going to be over here in H45. There's something in it already. So I'm going to double click on it, go to the end of it plus and then point it to that 99 bringing the balance down to zero. Then we've got the equipment account here, that's going to go to the equipment account on the trial balance here in cell H44. So within cell H44, we will say equals and point it to that 110,000 to credit, bringing the balance from 110 down by 110 to zero. Then we're going to go to the disposal so the gain or loss on disposal in this case loss on the income statement here. So we're here, we're going to be in H52, we will say equals and point to that 11,000 and enter. So you can see what that did is it's bringing net income down and went down by 22 overall, 11,000 for the depreciation and another 11,000 for the loss that we recorded when we recorded this disposal. And that means that the income minus the expenses and then minus this loss here, that's where we're getting the 66. So what this is income, net income, the credits beating the debits minus the 22,000 of depreciation and loss bringing us to 55,000. Okay, we got one more and this is going to be the same type of thing except now we've got $15,000 cash. So I won't calculate depreciation again, it's going to be the same calculation as up top. Here it is, it's the same 11,000. But now we got money for as well. So we got cash for so we got this 15,000. Everything else is in essence the same. So the first journal entry is the same, we're going to have to say okay, it was at 88,000 in a cumulative depreciation, it's not fully depreciated and we have to ask ourselves well, do we have to record any more depreciation before we do the disposal that hasn't been recorded because it's not the end of the month or end of the year and therefore the adjusting entry has not been made. And we're going to say yeah, we do, we have to record the 11,000 for the half a year that has passed since the last adjustment, which has not yet been recorded. So we're going to record our normal adjusting entry, that's going to be depreciation expense debit. So it's an F70, we're going to copy the depreciation expense, put that up top and B61 right click and paste 123 411,000. Then we're going to credit something for the 11,000 I'm going to do that with our plug formula negative of this 11,000. And then what we're going to go to the account we're going to go to there is accumulated depreciation. So we're going to copy accumulated depreciation, right click and copy, put that on the bottom in B62, right click and paste 123. Now that's going to be our normal type of just our adjusting journal entry that we're doing here to get us ready for the disposal process. I'm going to indent this going to the home tab alignment increase indenting, and then we'll post this out. So we'll post the depreciation expense to the trial balance, we are in h 70. So we will say equals and point to that 11,000 and enter. Then we'll go to accumulated depreciation, we're going to post this side to the trial balance here, we are in cell h 46 equals pointing to that 11,000, bringing the balance from 88,000 up by 11,000 to 99,000. Now we can see we're not fully depreciated again, it's 110,000 minus the 99, we still have a book value of 11,000. But this time we got money, we got scrapped, we scrapped it and got some money for the scrap of 15,000. So now when we do our second journal entry, we say is cash affected? We're going to say, yeah, we got cash on the scrapping 15,000. So I'm going to copy the cash, we'll skip a line and put another journal entry in B 40 64, right click and paste 123. And we're going to increase it with a debit 15,000. Then we're going to do our normal process to take everything off the books. And again, it's really helpful to have the trial balance, because we know this needs to go to zero, we know this needs to go to zero. And then we just need to do whatever we need to do in order to make the debits and the credits balance, meaning we'll post whatever the difference is to gain or loss. So I'm going to do the accumulated depreciation first, because it's going to be a debit and we'll go a little bit more and in order the debits on top as we if we can. So this has a credit balance of 99,000, we need to do the opposite thing to it, which is a debit. So we'll copy accumulated depreciation, right click and copy, put that in B 65, right click and paste 123. The amount will be the 99,000. And remember, you're going to have to if you don't have a trial balance and you didn't post this, you're going to have to realize that it was 88 and we made an adjustment. It's now 99 that we now need to take down to zero. And then the other side of this is going to be the equipment account. So it has a debit balance that needs to go down to zero because we're making a disposal. So we'll do the opposite thing to a credit. So we'll right click and copy the equipment, put that in B 66, right click and paste 123. I'm going to go ahead and indent that at the home tab alignment increase indenting. And the amount will be in D 66 negative 110,000. Okay, so now the debits don't equal the credits, we're at 114 on the debits, we're at 110 on the credits. That means we need another credit to be in balance. So we need another credit. And I'm going to do that with our negative sum formula. If I highlight this, it'll do the math for us 4000. Or if I say it's 114 minus 110 4000, we'll use our negative sum plug formula negative sum, double click the sum highlight from the 15 down to the 110. And that gives us our 4000 that we need. Now again, it's a little confusing to say that's going to be a gain or loss. Remember, that's always going to be a gain or loss when we're disposing. It might be confusing to know which is which here most confusing on this one. If then in the prior ones, if you look at it, of course, the book value is 110 minus 99 or 11,000. And we got 15,000. So we got more than the book value. So that's one way we can tell it's got to be a gain here, we got a gain, we got more money than the book value. The other way you can see it is of course, it's a credit and credits are kind of good on the income statement, they're going to increase net income. So those are two ways you can tell that it's going to be a credit. So we're going to copy the gain or loss right click and copy, we're going to put that in a B 67 right click and paste 123. I'm going to go ahead and indent it go into the home tab alignment increase indenting. And then we'll post this out. We'll post cash first here's cash. Here it is on our worksheet in H 61, we will say equals and point to the cash. And that brings the balance up from 500,000 by 15,000 to 500 and 15,000. Here's a cumulative depreciation. Here it is on our trial balance. We're going to double click on H 64 because there's something in it already will double click go to the end of it plus and point to that 99,000 bringing the balance down to zero. Then we've got the equipment at 110. Here's the equipment on the trial balance. I'm sorry, here's the equipment on the trial balance. We need to post that to H 63, where we will say equals point to that 110,000, bringing the balance down to zero. And then the last one we've got the gain or loss on disposal 4,000. We will post that down here in H 71 by saying equals point to that 4,000 bringing the balance from zero up by 4,000 to 4,000. So now that we're we've taken it off the books, the equipment and the accumulated depreciation we recorded the cash. And now we had to record the depreciation expense which brought down net income. And then we recorded 4,000 of gain which brought up net income net effect of these two journal entries is 7,000 decrease. So and remember this this is a credit that means it's a it's a net income the revenue minus expenses. And then it changed by it went down by 7,000 bringing this down to 59,000. So the the expense journal entry brought down net income. And then the gain on the sale brought it up for a net decrease of 7,000