 In this presentation we will take a look at the disposal of property plants and equipment for a piece of equipment that is not fully depreciated at the point of disposal. We'll take a look at the questions that we should go through and I would think through a journal entry as we think through the closing process to work through what that process will be. Note here that we're going to go through the disposal process and we also need to think about has the depreciation been fully depreciated at the point of time it's being disposed of. In other words, is there some depreciation, some time that has passed since the prior period of the adjusting entry process, the period where we would record the adjusting entry of depreciation expense and the point in time of disposal that we should record for depreciation. We'll take a look at that process as we work through. However, once the disposal is going to take place, we want to think first is cash affected. I would then think of a journal entry. If cash is affected, we would debit cash for the cash we received. Then we take the equipment off the books as well as the accumulated depreciation, the difference then being a gain or loss on the disposal. If in other words, we got more cash than the book value of the equipment, we would end up with a credit or a gain. If we got less cash than the book value of the equipment, we would end up with a debit or a loss. In our example, we're going to say that there's five year useful life property with no salvage value and it's disposed of in the middle of the fifth year. So first we're going to go through that question about whether or not we need to record more depreciation before we go through the disposal journal entry. That's going to happen if there's in the middle of the month or in the middle of the year and we have this time frame, either a partial year or a partial month in which there has been not recorded the depreciation journal entry because they're recorded as adjusting entries at the end of the time period. In our case, we're saying that these adjusting entries are going to be recorded each year at the end of each year. And in the middle of year five, the last year, we are disposing of this equipment before it's totally depreciated and therefore we need to account for before we dispose of it one half year of depreciation because the last year of depreciation happened at the end of year four when we did the adjusting process. We're in the middle of year five, we're getting rid of the equipment and we need to get it up to date in terms of those six months of depreciation that has not yet been recorded. To do that, we're going to take the cost of the equipment which will be 110,000. We're going to divide that by the useful life using a straight line method. We don't have any salvage values. We're not subtracting out the salvage. It's going to be a very simplified problem here and that's going to give us the 22,000 depreciation per year. Now we of course need half a year's depreciation to record for this problem that has not yet been recorded therefore we'll divide that by two for half a year and that'll give us 11,000 of depreciation we need to record. So if we look at our trial balance then we see that we have the equipment at 110,000 accumulated depreciations at 88,000. And just to double check our calculations there if we took the 88,000 divided by 11 or let's say 22,000 that's the depreciation per year we get four years. So we can see that that 88 is for four years and we're selling it in the middle or not selling it we're disposing in the middle of year five. So that means we have to record that 11,000 half a year's of depreciation to get it up to date before recording the disposal. So that's what we'll do first of all and if we can if we have the trial balance open we can see that right away we can say oh the equipment's on the books and it's not fully depreciated and once that happens we gotta say oh well is the it's the accumulated depreciation up to where it should be when was the last time we did the adjusting entry and if it's not we'll make it what it should be with an adjustment and then we'll do our normal disposal process. So the first entry will be just like any adjusting entry for depreciation it's going to be depreciation expense debit for that 11,000 then credit accumulated depreciation for the 11,000 that'll be our first transaction once we do that if we were to record this the 88,000 would go to 99,000 in accumulated depreciation then we can do our normal type of journal entry which is going to be one we take off the accumulated depreciation so note it's going to be at 99,000 after this transaction because we have 88,000 plus the 11,000 it's now at 99,000 when we work these type of problems and especially if we don't have the trial balance here and we just have these floaty numbers that they give us in a word problem that can even make it a little bit more difficult it's nice to have a trial balance even if it's not the trial balance you're working on with the same numbers just to see that the accumulated depreciation is a credit balance account it would go up with this credit because it would be doing the same thing to it to 99 and you can then figure out the disposal process we now need to take it off the books deboning it by the 99 then we're going to take the equipment off the books it's on the books has an asset 110,000 and we're going to do the opposite thing to it a credit 110 then we're going to have the difference obviously we have a credit 110 a debit of 99 the difference is 11,000 which is really it's the half a year of depreciation we haven't recorded so this 11,000 is the depreciation we recorded we still have half a year depreciation we did not record and it's going to be a loss because we didn't get any cash for it so in other words on the books we have the book value of 110,000 minus the accumulated depreciation is 99 and if we the difference being 11,000 book value we didn't get any cash and therefore half a loss so that's one way we know that this is not a gain but a loss this is a loss a transaction and the other way we know is because it's a debit if it was a debit that's going to be kind of like an expense because it's a income statement account and expenses will bring net income down if we post this out then we're going to say that the depreciation expense is here it's going to bring depreciation from zero up by 11,000 to 11,000 accumulated depreciation we're going to net these two out so accumulated depreciation is going to be the 99 minus the 11 so I know we kind of netted those out these two are being recorded at the same time and so it's the 88 and then we're going to take out the 88 the 99 minus the 11 bringing the balance down to zero and then we have the equipment at here we're recording this 110,000 credit here's a debit we're recording the credit to it bringing it to zero and then the loss on disposal being an income statement account going from zero in the debit direction by 11,000 to 11,000 looking at all the accounts we can see that we have done what we want we want to bring the equipment off the books we've recorded that depreciation and recorded the gain the effect on net income then is it was at 66,000 which is it's the credit minus the debits so that's net income not a loss and then we had it go down one by the depreciation we calculated so the depreciation expense brought it down and two by the by the loss that happened so it went down by 22,000 of net income after the disposal process because we disposed of something that wasn't fully depreciated and we had to record one the depreciation that hadn't been recorded up to this point and then the loss resulting from the fact that it still had a book value and we didn't get any money for it bringing the net income from 66,000 down by 22,002 55,000