 In this presentation, we will record the disposal of property plant and equipment for equipment that is not fully depreciated and for which we are going to receive some cash at the point of disposal. When we think about the process of the disposal process, we want to think about the steps to go through that will fit just about any type of disposal process. We also want to think too about the journal entry that may be necessary in order to record depreciation up to the point of disposal. We'll talk about that more in a second. In order to record the disposal, I would think about it as a journal entry, first asking the question as to whether or not cash is received. If it is, we would debit cash. Then we would take the equipment off the books with a credit to the fixed asset and a debit to accumulated depreciation. Both needing to be removed from the books and then we're going to have a debit or credit remaining again or loss based on this information. In other words, if we got more cash than the book value of the property plant and equipment than the asset minus the accumulated depreciation, we would have a gain. If we got less cash than the book value of the property plant and equipment, the asset minus the accumulated depreciation, we would then have a loss. If we look at our example this time, we're going to say that we have a five-year useful life, no salvage value, disposed of in the middle of year five. We're going to include to that that we received 15,000 as well. But in this case, what we first want to do is calculate the amount of depreciation that has not yet been recorded. So we're saying it's five-year property and we sold it in the middle of year five. Our assumption here is that the depreciation is only being recorded at the end of each year. Whenever we have a situation where the depreciation, and it'll always be the situation where the adjusting process will only be at the end of the month or the end of the year. And if we sell something in the middle of the month or dispose of something in the middle of the month or year, then we're going to have to say, okay, what are we going to do about that time period or that recorded depreciation that took place that we haven't yet recorded, I should say, up to this time? Because in this case, we recorded depreciation as of the end of last year. Six months have passed. We're not planning to record an adjusting entry for depreciation until the end of the year. So we have to account for that six-month time period before we do the disposal process. Calculation for that, we're going to say the cost is 110. This will be a straight line depreciation calculation. We're going to divide by the useful life five years. That'll give us depreciation per year, 22,000. And we need a half a year remaining that we didn't record yet. So we'll divide by two to get that half a year, and that'll give us 11,000. That'll be the depreciation for that half a year. So then if we go to our trial balance, we can see that we have the debits and credits, the debits not bracketed or positive numbers, the credits bracketed or negative numbers, the zero representing that the debits minus the credits equal zero or the debits equal the credits. And net income is the revenue, 100,000 minus the expenses. This being revenue, not expense. We're going to go through this process of recording the journal entry. First recording the accumulated depreciation and depreciation, the adjusting entry to get the book value up to where it should be at the point of disposal. And whenever we dispose of something, if we see that the equipment account is not the same as accumulated depreciation, then it's not fully depreciated or there's some salvage value. In any case, we want to ask the question as to whether it's fully depreciated and whether or not we need an adjusting entry. In this case, we do. We just calculated it. The adjusting entry will be the same as the adjusting entry for property plants and equipment, which is a debit to the depreciation expense for that 11,000 and a credit to accumulated depreciation. Once we have that on the books, then this 88,000 would be going up by that 11,000 to 99,000. Then we can take this off the books as we normally would. Once this has been recorded, we can then say, okay, now the equipment needs to go off the books and we need to record the gain or loss and we got this 15,000 of revenue on disposal. So is cash affected? We're going to say, yeah, we got cash 15,000. Then we need to take the equipment and the accumulated depreciation off the books. So the accumulated depreciation, remember, has a credit balance and it's really 99 at this time, the 88,000 plus the 11,000 or 99. It has a credit balance. We're going to take it off the books doing the opposite thing to it, a debit. The equipment has is on the books for 110,000 debit. We're going to take it off the books by doing the opposite thing to it, a credit. And then the difference is going to be 4,000. Now the difference is, of course, this 15,000 plus the 99 minus the 110, the debits are winning. Therefore we needed this credit to be in balance. So that's one way we know it's going to be a credit. Now when we see a credit, we need to know, well, is that a gain or a loss? And one way we know it's going to be a gain in this case is because it is a credit and it's an income statement account and on income statement accounts, credits are typically good. They're like income. This is being a gain, which is basically kind of income, increasing net income and the debit would be kind of like an expense decreasing net income. The other way we know is that the 110,000 minus the 99,000 is the book value of this property, plants and equipment. So how would we calculate the book value at this time, 110,000 minus 99,000? So we've got a $1,000 book, let's do that again, that doesn't look right, 110,000 minus the 99,000 gives us 11,000 on the book value and we sold it for 15,000. So if we subtract out the 15, we got $4,000 more than the book value of the equipment. So that's going to be a gain in that case. If we record this out, then we're going to say that the depreciation here, this journal entry, bringing the zero up by 11,000 to 11,000, the accumulated depreciation here is going to bring the 88,000 up by 11, but then we're going to combine that with this 99 so that we can put it on the same slide here. So we've got the credit here and the debit here, which will ultimately bring this up by 11 to 99 and then back down by 99, so we're going to credit it by 11, debit it by 99, which is a net of 88, bringing it down to zero. And then the cash is going to be here, there's the 500,000 and we're going to debit it by 15, bring it up to 515, credit to equipment. So here's the equipment count, 110,000, we will credit it by 110, bringing the balance to zero and then we have the gain or loss. So here's the gain or loss, zero, it's going to go up by the 4,000 to 4,000. If we look at this in context in relation to all other accounts, we can see that the cash account went up by 15, we got the equipment and accumulated depreciation off the books, that being the goal, the depreciation expense went up by 11,000, bringing net income down and then the gain went up by 4,000, bringing net income up. So in other words, net income was at 66,000, it went down by the depreciation that we had to record for that half a year that we had not yet recorded and then it went up for the fact that we had a gain on the sale, meaning the cash we received was greater than the book value, the net then being a decrease in net income of 7,000. So the net income started at 66,000, which was the 100,000 minus the forward, the 30,000 minus the 4,000, it then went down by 7,000 to 59,000 or in other words, we had net income of 66,000, it went down by the depreciation of 11,000, then up by the gain on the disposal of 4,000 to 59,000.