So let's discuss what happens when we take a fixed asset that we've used for a long time. We fully depreciated and now it's finally time to retire that asset. So we're gonna talk about the retirement of these fixed assets and no, it's not retirement where it's gonna get, you know, a pension and Social Security benefits Medicare. Now this is just, we're taking it off of our books because we're no longer gonna use it. All right. But one thing I want to note is that sometimes we'll have a fully depreciated asset, a fully depreciated asset, but we'll keep using it right? Because we estimated a useful life for this asset, but it might work longer than that. We might use it for many years after that. And in those years we're not gonna keep depreciating it. We don't take any more depreciation expense. So remember that this useful life that, that we came up with it is an estimate. Okay. The company estimated the useful life and it might end up working longer. So when it finally does come time to dispose of that asset, we can get rid of the fully depreciated asset either for money, which we'll talk about in another video, but we're here going to focus on what happens when we do it for no money. We're just going to take that machine and we're like, hey, you had a good run buddy and we throw it in the dumpster behind the factory. Okay. We're not gonna get any money for it. So a disposal with no pre proceeds, that's what we're talking about is this asset retirement, There's no proceeds involved proceeds being cash that we received for for getting rid of it. So there's gonna be two situations this this retired asset, it's either going to have no salvage value where we never estimated that we could that it would be worth anything at the end or it could have salvage value. Let's focus here first on a situation where it has no salvage value. So remember when we first estimate to calculate depreciation, we needed three variables cost useful life and residual value or salvage value. So if we had estimated that it would have no salvage value, Well then once we're done depreciating the asset we fully depreciated. Well, the netbook value of the asset is going to be zero. Right? There will be no netbook value because it had no salvage value. Alright, So let's look at an example like that On April 1, 2009 or 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 no salvage value. Right? So that doesn't really matter about what method we used, how long it was in service. All we know is that it's fully depreciated. So once it's fully depreciated. Well, it's net book value will equal the salvage value? And when there is no salvage value? Well, it's going to equal zero. So what does this tell us? It tells us that the equipment account Where we had this asset? Well, we had purchased it for $80,000, right? And I'll just put 80 there and we were depreciating it over its useful life. And its accumulated depreciation account is gonna have a credit balance of 80,000. Right? And that's how we get to this netbook value of zero. Because we have an 80,000 debit, 80,000 credit in accumulated depreciation. And we met those together. And well, we have zero. So how do we get this off of our books? We just took this this machine and we threw it in the dumpster outside. It's no longer in our factory. We're no longer using it. We should get it off of our books. So all we need to do is we need to reverse these numbers, right? The equipment has an $80,000 value. Well, we no longer have that equipment. We gotta get rid of it and we no longer have that accumulated depreciation related to it. So what we're gonna do is we're going to debit our accumulated depreciation. This is gonna be the debit in our in our transaction here. And that's gonna be for the full 80,000, right? The full 80,000. And that gets it gets rid of that accumulated depreciation. Let me do that in a different color. So we can See it in action. So that 80,000 right there. And then we're gonna credit what's gonna be the credit, the equipment, right? We're getting rid of the equipment. So we're crediting it here, And that was for 80,000 as well. Whoops, Right. And this would be an 80,000 here. So these cancel out and there would be nothing left. These cancel out. There's nothing left there. So we cleaned out our books. Right now, there's no more equipment on our books, no more accumulated depreciation related to this asset. Right? So that's how we would retire. This asset is by getting rid of its position in the books. So even though nothing really happened, right, we didn't the net book value of it was zero, so it wasn't increasing our assets at all, but it was sitting there and there's no reason to have it on our books, cluttering up our books if we don't own it anymore. So we're getting it off of our books. So what did we do? Our accumulated depreciation went up by 80,000, right? Because it had a credit balance and we debited 80,000. But then our equipment Went down by 80,000. So really nothing happened. Our assets stayed at the same balance, we just got it off of our books. This is more of like a technical entry just to clean up our books and make sure that everything is in order. Alright, let's pause real quick and then we'll talk about what happens when an asset had a salvage value. But we got no proceeds when, when we disposed of it. Alright, let's do that in the next video.
Retirement of Fixed Assets (with Salvage Value)
Play a video:
Was this helpful?
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.
A company using the double-declining-balance method for recording depreciation has a fully depreciated asset with a salvage value of $8,000. The asset originally cost the company $62,000. If the company retires the asset in the current year for no proceeds, the journal entry to record the disposal would include: