 Hello and welcome to this session. This is Professor Farhad and this session will look at disposal of assets. This topic is covered in a financial accounting introductory course, as well as the CPA FAR section. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover, including CPA questions. If you like my recording, please click on the like button, share them, put them in playlists, subscribe. If they benefit you, it means they might benefit other people, so share the wealth, especially these days with the coronavirus out there. And please connect with me on Instagram. On my website, you will find additional resources to supplement your accounting education, as well as your CPA preparation. I strongly suggest you check out my website. In this session, we're going to get to the last part of having a plant issue, the last part of its life. And what are the life of a plant asset? First, we acquire the plant asset and we have to worry about computing the cost. And we did this in a prior recording. Check the playlist. Then we have to determine the depreciation, which is allocating the cost to period benefit. We already covered this topic. We also have to account for subsequent expenditure. We looked at that topic. And the last thing, once we are done with the asset, we dispose of it. And in this session, we're going to see how we can sell it. So we're going to dispose of the asset by selling it. Now, selling it is not the only option. We could also exchange it. Now, in this recording, we're going to focus on selling the asset. So what are the steps and how when we sell an asset, what are the procedures? So the first thing we have to understand is, and you're going to see why that's important, is we have to update. We have to update our depreciation to the date of the disposal. This is important. Now, why? Why this is important? Because when you sell the asset, you have to find the book value. And if you don't know what the book value is, we talked about the book value in prior recording. The book value is the cost of the asset minus accumulated depreciation, gives us the book value. So we have to have the proper book value. Now, why do we have to have the proper book value? Because once we have the proper book value, we determine whether we had a gain slash loss on the asset. So that's why the book value is important. And to get to the book value, you want to make sure your depreciation is up to date. What does that mean? It means you might have the asset. This is year five. You might have the asset depreciated as of year five. Then you sold the asset sometime in year six, sometime in year six. Guess what? Then you have to make sure you book the depreciation all the way until the date of the disposal, which is the X is the date of the disposal. So the first thing you have to do is to make sure your depreciation is up to date. And you will see why that in a moment. But I want to emphasize this point because that's the first thing you need to do when you are selling an asset. Is your depreciation up to date? This means your book value is up to date. This means your gain and losses are correct. Then you journalize the entry after you book the depreciation. First, if you receive cash, you debit cash. When you sell something, you would receive cash. Sometime the asset is so bad, you have to pay cash to get rid of it. You credit cash. So sometime we might pay cash, we might receive cash, sometime we might have to pay cash. You need to get rid of the asset. So basically, what are we looking at here? You have to remove the asset. And by removing the asset, remember the asset, if you have an asset, client asset, it has a debit balance. So to remove the asset, you have to credit the balance. So removing the asset by crediting the asset. So this is why the asset goes down to zero. And remember what comes with the asset is an account called accumulated depreciation. Remember accumulated depreciation is a contra asset account. It has a credit balance. So it has a credit balance. So to get rid of it, we have to debit the balance to make it go down to zero. So if we paid cash, we credit cash. If we receive cash, we debit cash. Then we remove the asset, remove its accumulated depreciation. Then we have to determine whether we had a gain or a loss. We have to record either a gain or a loss. Again, the balance of a gain is credit. Gain are like revenues. They increase your asset. They enhance your asset. Losses are like expenses. They take a debit balance. So those are their balances. Now, how do we determine whether we have a gain or a loss? And this is what trip students a lot. So now on the next slide, I'm going to tell you how do we determine whether we have a gain or a loss. So please listen to the rules carefully because you want to get them right the first time. And once you get them right, you're good to go. How do we determine whether we have a gain or a loss? Here are the rules. If the cash received, if we received cash more greater than the book value, the book value is what? Again, the book value, sometimes it's giving, sometimes you have to compute the book value. If it's giving, it's easy. Otherwise, its cost minus accumulated depreciation will give you the book value of the app. If the cash that you received is less or if you had to pay cash than the book value, you have a loss. So this is how you determine the gain or the loss. Did you receive cash more than the book value? Or did you receive cash less than the book value? If you received cash exactly equal to the book value, you have no gain and no loss. Once again, you would record the cash, whether you received cash or paid cash, you remove the asset, remove the asset, remove its accumulated depreciation. Basically, those steps, they go hand in hand because it's the same thing. When you remove the asset, the accumulated depreciation is part of the asset. Then you record the gain or the loss based on these formula. Now, the best way to illustrate this is to work a few examples. Let's look at a machine that has a cost of 9,000. An accumulated depreciation of 9,000 is of December 31st of the prior year. So if I stop right here and usually I will ask you, what is the book value of this asset? Here's what you should be thinking. We have an asset, a machine. The machine has a cost, which is historical cost of 9,000, and it has an accumulated depreciation of 9,000. So if I ask you right now, what's the book value? Well, the book value equal to zero. Why 9,000 of the cost, which is the cost of the machine, minus 9,000 of accumulated depreciation of accumulated depreciation will give us a book value of zero. So the book value of this asset equal to zero was discarded on June 5th of the current year. So it was fully depreciated. So we don't have to worry about updating the depreciation because it's fully depreciated. There's nothing to depreciate anymore. And the book value equal to zero. It doesn't say we received cash. It doesn't say we paid cash. Good. And it says the company is depreciating the equipment using the straight line method over eight years with zero salvage value. So they already told us it has been depreciated. Did we receive any cash? Do we debit cash, credit cash, no cash? Now, do we have a gain? Do we have a loss? Well, if you did not receive cash and the book value equal to zero, so cash zero equal to book value of zero, there's no gain, no loss, no cash. What's left with is we have to get rid of the machine. We have to credit the machine 9,000, make it go down to zero, and debit the accumulated depreciation to get rid of this to bring it down to zero. Okay. So notice now there's no gain, no loss, and we get rid of the machine. That's pretty straightforward. No cash involved, no gain, no loss. Doesn't get any simpler or easier than this. Now, bear in mind on the balance sheet, on the balance sheet, the machine is worth zero. Why? Because the book value is zero. So on the balance sheet it's zero, but we need to remove it. Let's take a look at another example. Equipment costing 8,000. So start with 8,000. We had a cost of equipment. It has a cost of 8,000 debit balance with accumulated depreciation of 6, and we have accumulated depreciation of 6. If I stop right here, as of December 31st of the prior year, of the prior year, let's stop right here, of the previous year, if I ask you right now, what is the book value of this asset as of December 31st, and hopefully you know the book value of this asset equal to 2,000. Okay. It was discarded, sorry, let's go back. It was discarded on July 1st. It was not discarded December 31st. So before we get rid of it, we have to update the depreciation as of July 1st. Well, January, February, March, April, May, and June. We have to depreciate the asset for six months before. So this amount, that's going to go up. The company is using the straight line method over eight years with zero salvage value. That's easy. If they have an asset of 8,000 with a cost, it's being depreciated over eight years. So every year, you depreciate the asset by 1,000. Now we only have to depreciate it for half a year times half. So we have to update depreciation by 500. So the first thing we do is we debit depreciation expense by 500, credit accumulated depreciation by 500. Now we have an additional 500 as of the disposal date. Therefore, the accumulated depreciation is 6,500. Now if I ask you, what is the book value, the book value equal to 1,500. 1,500 because 8,000, 8,000 of the cost, 8,000 minus 6,500 equal to 1,500. So that's my book value. Now we get root of the asset and we did not receive anything. We did not receive cash. So what happened? What's the cash? The cash equal to zero. So basically, I received nothing and I get root of an asset that's worth 1,500. Guess what? I have a loss of 1,500. So I remove the asset. I credit the equipment. I remove the asset. That's part of my part of the entry. The asset is gone. Then I have to remove its accumulated depreciation. I have to debit this account, 6,500. Let's go down to zero. And so I remove the asset. I remove its accumulated depreciation. Well, I did not receive any money. I lost. I have a loss of 1,500. Why is a loss? Because zero cash compared to 1,500. Guess what? I have a loss of 1,500. I received no cash. Let's take a look at another example. March 31st, BTO sells equipment with an original cost of 16 and accumulated depreciation of 12,000 as of 1231 of the prior year. So if I ask you, what is the book value as of 1231? The book value as of 1231 is 16,000 minus 12,000. So the book value is 4,000, but I did not get rid of it on 1231. I get rid of it on March 31st. It means I have to book an additional three months of depreciation. Let me show you the T-account. So I have the equipment of 16,000. I have accumulated depreciation for that equipment of 4,000, but this was as of 1231. BTO uses the straight line at 4,000 per year. So they're given us 4,000 per year. All what I have to do now is book the depreciation for three additional months. So if it's 4,000 per year, well, I have four quarters. I sold it at the end of the quarter. I have to add 1,000 of depreciation. Now, when I'm selling the asset, sorry, the accumulated depreciation is 12,000, not 4,000. I apologize. 12,000. The book value is 4,000. I have to add an additional 1,000 of accumulated depreciation. Therefore, my accumulated depreciation as of 331, as of the disposal date is 13,000. It means my book value equal to 3,000, which is 16,000 minus 13,000. And the equipment was sold, guess what, for 3,000 exactly. So the book value is 3,000. It was sold for 3,000. So what's my gain or the loss? Nothing. So first, I update depreciation. I have to book this $1,000. I debit depreciation expense, credit accumulated depreciation. As a result, my depreciation is up to date because that's always step one. Step two is compute the gain or the loss. And I already told you there is no gain or no loss because we sold it for 3. And the book value equal to 3, we have no gain and no loss. But we received cash. So we debit cash, 3,000. We have to credit the asset to bring it down to zero, bring it down to zero. We have to credit the asset. Now, the balance for the asset is zero. So this asset is gone. And we have to debit this account 13,000 to get rid of accumulated depreciation. So no loss, no gain. And we receive cash. Let's assume we're looking at the same exact example here, the same exact example, except that we sold the asset for 7,000. So same thing, same example, except we sold it for 7,000. Now, cash equal to 7,000, greater than the book value, which is 3,000. Now we have a $4,000 gain. Well, everything else is going to stay the same. So we're going to update the asset. Now, we're going to receive the cash. The cash is 7,000. So not 3,000 anymore. So if we receive more than 3,000, every dollar more than 3,000, for every dollar in addition to the 3,000, we're going to have a dollar in gain. How many dollars do we have more than 3,000? We have 4,000. Therefore, we have a gain of 4,000. Therefore, we debit cash. That's easy. We get rid of the asset, get rid of accumulated depreciation. The only difference now is we have a gain of 4,000. We have a gain of 4,000. Let's assume the same exact example. Now we sold the asset for 2,500. What does that mean if we sold it for 2,500? If we sold it for 2,500, we have a loss of 500. Why? Because the book value of this asset is 3,000. Therefore, the first entry is the same. Now we receive cash of 2,500. We have to get rid of the equipment, get rid of the accumulated depreciation. Notice this entry is the same. Notice this entry is the same. We get rid of the equipment, get rid of the accumulated depreciation. It's the same. Whether we have a gain, we have a loss or we don't have anything. Notice it's the same. This entry does not change because we need to get rid of the asset. That's the same. In this scenario, we have a cash of 2,500 and we have a loss of 500. Simply put, for every one dollar below 3,000, we have to book a loss. Now we have 500 dollars below 3,000. Therefore, it's going to be a loss, a loss of 500 dollars. That is basically selling the asset at either break even, break even, which is no gain, no loss, a gain and a loss. Make sure you know the rules. Those are pretty powerful concepts you need to be familiar with. In the next session, we would look at natural resources. Once again, if you like this recording, please click on the like button, share them, and if you're looking for additional resources, please visit my website. Subscribe if you haven't subscribed to my YouTube. Visit my website for additional resources. If you'd like to supplement your education or get those 7 to 10 extra points on your CPA exam so you can pass and move on. Stay safe, especially these two coronavirus days.