Here's an example. A company sells one of its machines on January 31 for $5,000. The last time depreciation was recorded was on December 31. Depreciation expense is $400 per month. The general ledger shows the machine's cost was $50,000 and its accumulated depreciation at December 31 was $40,000.
On January 31 the company will debit Depreciation Expense for $400 and will credit Accumulated Depreciation for $400 in order to record the depreciation during January. In its next entry on January 31, the company will debit Cash for $5,000 (the amount received); debit Accumulated Depreciation for $40,400 (the balance at January 31); debit Loss of Disposal of Asset $4,600; and credit Machines for $50,000.
Let's step back and review the disposal of the machine. As of January 31, the machine's book value is $9,600 (cost of $50,000 minus its accumulated depreciation of $40,400). Because the asset is sold, the $9,600 of book value or carrying value is removed from the accounts. In its place, the company received and records the cash of $5,000. Since the company received $4,600 less than the amount it removed, it will report a loss of $4,600.
If the company had received more cash than the asset's book value, it would report the difference as a credit to Gain on Disposal of Asset.
Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1,700 accounting exam questions (and answers) when you upgrade to PRO.