Retirement of Fixed Assets (with Salvage Value)

Brian Krogol
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Alright, so when an asset does have a salvage value? Well, what's gonna be the assets net book value? Once it's fully depreciated. So once we fully depreciated the asset, Well, the netbook value is equal to the salvage value. Okay, so they are gonna equal each other. And that should make sense from all our depreciation examples. Once we were done depreciating what was left in the netbook value? It was that salvage value, the residual value. So let's check out this example on april 1st 20 x nine, the company decides to dispose of a fully depreciated asset. The asset was originally purchased for 80,000 and was depreciated using the straight line method over the past 10 years with $6000 salvage value. However, the company received no proceeds on the disposal of the asset. So at first they estimated they were going to get $6000. So their depreciation expense Pro rated for that amount. To make sure that at the end there would be a $6,000 netbook value. But now they said, Hey, nobody actually wants to buy it. They took the machine threw it in the dumpster, got no money for it. Right? So that's $6,000 salvage value. Unfortunately they don't get it. So let's go ahead and look at our t accounts for our equipment and for our accumulated depreciation. So our equipment. Well, it would have had an $80,000 balance, right, $80,000 balance in our equipment account. But what about our accumulated depreciation? When we fully depreciated it, well, it didn't reach the full 80,000, right? There was still 6000 in netbook value. So the 80,000 minus the 6000 in in salvage value. Well, that comes out to 74,000. Right? And that's the amount of accumulated depreciation that was on our books after those 10 years of depreciating the asset. So we would have had this credit balance of 74,000. And that should make sense. Right, if we had a debit of 80,000 in our equipment, a credit of 74,000 in our accumulated depreciation. Well, the netbook value of the two, is that $6,000 salvage value. Alright, so now we gotta get this off of our books. We already threw it in the dumpster. Well, now it's the accountants turn to put it in the dumpster as well. Alright, so let's go ahead and make our journal entry here to get rid of these accounts. So the first thing we need to get rid of. Well, let's do our debit. The accumulated depreciation has to go, right, there's not gonna we got rid of the asset, so we gotta get rid of the accumulated depreciation for it. So we're going to debit accumulated and I'll be, I'll abbreviate it there, accumulated depreciation, and that's gonna be a debit of 74,000. Right, Because we got to get that off of our books. And then we're going to credit equipment, right? Equipment has to be credited to get rid of that off of our books. But that was for 80,000, right? Because it had an $80,000 value. So that gets rid of those on our books. There's no longer any accumulated depreciation. There's no longer any equipment on our books. It's all gone. But this, this doesn't balance right. There's a $6,000 difference between the two. Well, it's time to write off the rest of that value that we still had this netbook value of 6000, we threw it in the dumpster, we threw away the $6,000 that we thought we were gonna get. What we were actually never gonna get them. Okay. Um, this could have, you know, maybe we should have made a better estimate and estimated, hey, actually we were gonna get no salvage value, but we couldn't have known better at the time. Maybe we thought it was gonna be worth 6000 and today, all of a sudden it was just not worth anything when we tried to sell it. Okay. So what we need to do is we're gonna take a loss. Okay. And this will be a loss on disposal or loss on retirement of the asset and it's gonna be a debit. So remember losses are similar to expenses, except these are one time things that happened from some certain event and expense. Well we got some benefit from that. We can have a loss, which is similar to an expense or we can have a gain that's similar to a revenue. Right? So in this case we have a loss on the disposal of this asset And it's gonna be for those 6000 in salvage value that we never recovered. Okay, so this loss is going to our income statement, we would have this under our operating section. So we would have our revenues from operations cost a good sold, then we would have all our operating expenses and then we would get to other income and other expenses after that. And this is where that loss on disposal would show up is in that other section. Cool. So let's see what happens here. We got rid of our equipment, right? Our equipment went down by 80,000. Our accumulated depreciation went up by a by 74,000. Right? That should make sense that it went up because it had a contra account. But as an asset assets go up with debits. So the asset value really went up by 74 in that Case. But the assets in total, the netbook value went down because of that $6,000 loss and that 6000 is going to our income statement. So it's going to show up over here in our equity, right? Because all of our, All of our losses go through the income statement and our income statement, our net income goes to equity through retained earnings. So it still balances out. Our assets went down by 6000 are equity went down by 6000. Alright, so there's our journal entry and why don't you guys go ahead and practice a problem related to an asset retirement? Alright, let's try that now.