 In this presentation we will take a look at the disposal of property, plant and equipment for a fixed asset that is fully depreciated and cash is received upon the disposal process. For more accounting information and accounting courses visit our website at accountinginstruction.info. Whenever we think of any disposal, we do want to go through our series of questions related to the disposal process so that we have a system to go through in each case, each scenario that will work. I would do this with a journal entry. The series of questions starting off with our question of is cash affected? If it is then we know we're going to start our journal entry with a debit to cash. The next component is to remove the property, plant and equipment and the related accumulated depreciation from the trial balance. We can do that with a debit to accumulated depreciation and a credit to the fixed asset account. Then we can look at these and we can say okay is there going to be a debit or credit remaining? Meaning if cash is greater than the book value, cash is greater than the fixed asset minus the accumulated depreciation, we'll have a credit that we will need that will be a gain. If on the other hand the cash we received is less than the book value, less than the fixed asset minus the accumulated depreciation, the item we will need will be a loss. So that's going to be determining whether we have a gain or a loss. In our example here we're talking about a fixed asset that is fully depreciated. We can see it on the trial balance and I do recommend that you always have a trial balance in front of you even if it's not the trial balance for the problem you're working on. Just so you can see what the equipment is, what the accumulated depreciation is and the depreciation accounts and have some idea of whether their debit or credit accounts and how to remove them. In our trial balance the debits are represented with non-bracketed numbers or positive numbers. The credits with bracketed numbers, the debits minus the credits then being equal to zero meaning we are in balance. The revenue minus the expenses is the 66,000 net income. In this scenario we can see that it's fully depreciated. This piece of equipment that we're selling this 110 representing one piece of equipment. Because it's fully depreciated here the accumulated depreciation is equal to the equipment that means that it's fully depreciated and there's no salvage value. In other words the book value at this point in time is equipment minus accumulated depreciation or zero. So we don't need to do any more depreciation expense. We don't need to say hey is there any depreciation we need to record before we make our adjustments here because it's fully depreciated. There's no other depreciation we can record at this point in time. So our goal here first is cash affected. We're going to say that we scrapped it for $500 we got cash. So cash is a debit balance account. We're going to increase that by the 500. Then we're just going to go through this and remove the equipment and accumulated depreciation. Something that's very easy if we have the trial balance and or the sub ledger listing that information out for us. And so if we then just going to remove the equipment it's got a debit balance here we're going to do the opposite thing to it to take it off the books a credit. And then the accumulated depreciation has a credit we need to do the opposite thing to it a debit to take it off the books. Now it could be confusing if we don't have the trial balance in front of us to know whether or not accumulated depreciation is a debit or credit it being a contra asset account that could be a bit confusing. However it's important to note that whenever we remove the equipment we need to remove the related accumulated depreciation amount as well. Then we're just going to see the debits and credits and see what we need in order to be in balance. So this of course adds up to 110,500 debits credits add up to 110,000 even therefore we need a credit of 500. Notes here this is going to be the full journal entry. Note that I didn't construct this in such a way that the debits are on top and the credits are on the bottom. If you're in a circumstance where you think it's very important to do that then you can put the debits on top and the credits on bottom. I do recommend constructing it in whatever way makes sense. I think this is the easiest way to construct it to make sense. And if you don't have any restraints on putting the debits on tops just for formality purposes it might be best even to leave it this way because then when you go back to it it's easier for you to go through your thought process. Say okay cash was first, equipment went off the books and then accumulated depreciation. It's probably easier to read it from top to bottom than to read it from debits to credits. So for that reason you might want to leave it in this format to go back and be able to review it. So that's going to be the transaction. Also note it can be confusing to know whether or not this 500 is going to be a gain or a loss. A couple ways we can see that. One is that we can see well the book value is zero meaning it's equipment minus accumulated depreciation. Therefore the 500 we received minus the book value of zero means that the whole 500 is gained to us. It's all a gain and therefore it's a credit or a gain. The other way we can see it is we can say well it's a it's a credit and we know that the gain or loss account is going to be on the income statement and on the income statement credits are like good credits are like income. Income is credit accounts revenue and the expenses are typically bad. Those are like the expense accounts. So if we have a credit here we have a gain like revenue which should increase net income which would make sense in this case. So if we post this out then we're going to post the cash here. So here's the cash posting out 500 plus the 500000 gives us the 500500. Then we're going to post out the equipment. So here's the equipment here. It started at 110,000 debit. We are crediting it by 110,000 bringing the balance down to zero. Then the accumulated depreciation here on the journal entry we're going to post it here on the trial balance starting out with a credit of 110,000 debiting by 110,000 bringing the balance to zero. And then we've got the 500 gain and that's going to go to our gain or loss account that we have to add here. We're going to say the zero in the credit direction by 500 to the 500. So if we look at the trial balance with all accounts included we've got the cash going up from 500,000 by 500 to the 550. We see the equipment and accumulated depreciation being taken off the books and we have this gain here meaning the 66,000 of net income which was the 100 minus the 30 minus the four gives us 66,000 is increased by the 500 to 66,500. This being net income not a loss that a result of the 500 cash received being greater than the book value the equipment minus accumulated depreciation the result being a gain on disposal. For more accounting information and accounting courses visit our website at accountinginstruction.info