 Hello and welcome to the session in which we would look at selling or disposing of property plant and equipment. Companies at any time they can sell, exchange, retire, get rid of any of their assets. For example, you might have a piece of equipment, you want to sell it, you no longer need it, you will sell it, you might have a piece of equipment, you may want to upgrade it, you will exchange it for another piece of equipment, so on and so forth. So a company can retire or sell plant asset at any time. Plant assets are also property plant and equipment by selling the asset, you can discard the asset, you can exchange it for another asset. Sometime you might have involuntary conversion, simply put you are forced to sell this asset or you lost the asset not because you wanted to, for example, a flood, a fire, that asset is no longer functioning in voluntary conversion or abandonment. So what do we have to do from an accounting perspective when it comes to disposing or selling the asset? The first thing we have to do is to make sure the asset is depreciated up to date. So update the depreciation up to the disposal date. Why that's important? That's important because when we discard an asset, when we sell an asset, we have to know the book value of the asset and to compute the book value of the asset, you need to know the depreciation up to date. So that's the first thing you do, you make sure when you're looking at the problem is my depreciation up to date. If not, you bring your depreciation up to date. Then you journalize the entry. How do you journalize the entry? Well, you start with the easy part. If you received cash, you debit cash. If you have to pay cash to get rid of the asset, you credit the cash. Then you get rid of the equipment and it's accumulated depreciation. So you debit accumulated depreciation and you credit the asset. So simply put, because the plant asset will have a debit balance. So you will need to credit them. You need to credit them. Therefore, you credit them. Accumulated depreciation will have a credit balance. Therefore, you debit them. You debit them to get rid of them. Then you get rid of the asset, you get rid of it's accumulated depreciation. And what's left is determine whether you have a gain or a loss. And you have to record the gain, the gain takes a credit, the loss takes a debit. How do you determine whether you had a gain or a loss? Here's what you do. You look at the cash that you receive. You receive some amount of cash or you received none, maybe zero cash. Okay, but you look at your cash and compare the cash to the book value of the asset. Now hold on a second. You need to know what the book value is. The book value equal to the cost of the asset minus accumulated depreciation. Simply put, the book value of the asset is the plant asset minus its accumulated depreciation. The cost of the asset minus its accumulated depreciation. If you received cash more than the book value, you said to assume you received $10 in cash and your cost is 100 and your accumulated depreciation is 95. Therefore, your book value is five. If you received cash and the book value is five, you have a gain. If you received cash and the book value happens to be, let's make it 12, which will make accumulated depreciation 88. So if you have a cost of 100 accumulated depreciation of 88, so the book value is 12, now you have a $2 loss. If the cash equal to the book value, you have no gain and no loss. Now the best way to illustrate this is to work an example. This topic is covered in intermediate accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your CPA review course. I'm a useful resource to your accounting courses. 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Take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on Instagram, Facebook, Twitter, and Reddit. Let's take a look at this example to illustrate the concept. Adam discarded on July 1st, be careful about the date and equipment costing 10,000, the other with accumulated depreciation of 7,000 on December 31st. On December 31st. Simply put, on December 31st, 10,000 minus 7,000 will give us 3,000 book value for this asset. The company is using the straight line depreciation over 10 years with zero salvage value. What does that mean? Simply put, we have a 10,000 asset, the cost of the asset minus zero salvage value divided by 10 years. So every year we are taking $1,000 of depreciation. Now be careful. We got rid of this asset on July 1st, not on December 31st. So it's very important. What does that mean? It means we have to add another six months of depreciation. So we're going to take $1,000, the full year depreciation multiplied by one half, and we're going to debit depreciation expense 500. Remember what I told you, the first step to make sure your depreciation is up to date. My depreciation is not up to date. Why? Because 7,000 as of December 31st. I did not sell this asset till July 1st. Therefore I have to reduce this book value by an additional 500. Therefore my book value of this asset is 2,500, and credit accumulated depreciation 500. Now I have my depreciation up to date. Now I need to discard. They just got rid of this equipment. How much cash did they receive here? How much cash? Well, zero. They didn't receive any cash. Let's look at the journal entry. I'm going to credit the equipment 10,000 for the cost. Debit accumulated depreciation for 7,500. Remember, the depreciation now is 7,500. Now I get rid of the equipment. I did not receive any cash. I did not pay any cash. The difference is basically a loss because my book value, my book value, so what's my cash? Remember, I compare my cash to my book value. My cash is zero. Book value 2,500. I have a loss. Simply put, as long as I don't receive more than 2,500, I have a loss. If I receive exactly 2,500, I break even. Let's assume somebody paid you 2,500 for this asset. You will not have a loss. If they paid you 2,500, you will have cash 2,500. Therefore, you debit cash, debit accumulated depreciation, credit equipment. Let's assume someone paid you $1,000 for this asset. Well, if they paid you $1,000, you debit cash $1,000. Now you have $1,000 of cash. Your book value is 2,500. You still have a loss of 1,500, and the loss will be 1,500. You debit cash $1,000, debit accumulated depreciation, debit a loss of 1,500, and credit the equipment. Now let's assume this same asset was sold for $3,000. What does that mean? $3,000 is more than the book value. So the cash is 3,000. The book value is 2,500. The cash is greater by 500. Therefore, we have a gain. Let's do the entry. We're going to debit cash $3,000. We're going to credit the equipment $10,000. Debit, it's accumulated depreciation $7,500. So this is the book value of 2,500. Then we have a gain. The gain on disposal is $500. So this is how we will book the gain. So simply put, once you know the book value, any amount above the book value, the book value is 2,500, will give you a gain. Any amount below the book value is a loss. And if you receive exactly the book value, you have no gain, no loss. Now let's take a look at something called involuntary conversion. And I have to clarify that in this session, we are looking at the involuntary conversion from an intermediate accounting or from a financial accounting and reporting perspective. The reason I need to clarify this, because when you are working with taxes, if you are studying for your tax exam, then things are a little bit different. So I just want to make sure you're aware of that. So what is involuntary conversion? It's when you lose an asset due to fire, flood, theft, condemnation from the government, whatever that loss is. It's not that you want it to happen, but it happened. So how do you do this? It's basically just like selling the asset. You will take the difference between the amount that you recovered. For example, from a condemnation award, the state might give you some money or from an insurance company. You will take the difference and you compare what you received in cash versus the book value. Exactly the same thing as we just talked about a minute earlier. So involuntary conversion is treated the same way. Let's take a look at an example after several years of negotiation to buy a warehouse from Adam Company, the state government exercised its right of eminent domain in order to open a path for the state highway. Eminent domain means the government can take over your land for the public good. The case was settled in favor of the state. So Adam tried to appeal, tried to do everything, could not, they lost it. And the state awarded Adam $300,000. The state said here's your money, $300,000. The book value of the warehouse was 325. So the Adam's warehouse has a book value of 325, cost of half a million, accumulated depreciation of 175. Let's generalize the entry for Adam. Adam would receive a check from the state for $300,000 will debit cash. Adam will need to get rid of the warehouse, credit the warehouse for half a million, debit its accumulated depreciation for $175,000, which will give us a book value of $325,000. This is the book value. Well, guess what? Adam received $300,000. What does that mean? $300,000 is $25,000 less than the book value. It means Adam would record the loss on the disposal of this warehouse of $25,000. So this is situation as a loss. I would say Adam should have just sold it to the state initially. Anyhow, to really understand this concept and understand any concept, you need to work additional multiple choice examples, see additional lectures. Go to my website, farhatlectures.com and start to work some examples. At the end of this recording, I'm going to remind you again, whether you are an accounting student or a CPA candidate, take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition. I don't replace your accounting course. I'm a useful addition. I can help you do better. The CPA is worth it. The CPA is a lifetime investment. Your accounting career is a very rewarding career. Take it seriously. Don't sure change yourself. Study hard. Good luck. Put it behind you and stay safe.