Amortise to the date; remove cost and accumulated; record proceeds; plug the gain or loss

◈ 12 cards

Record the sale of a long-lived asset mid-year in two entries — the catch-up amortisation and the disposal — and check the whole life with the total-cost-of-ownership identity.

The groomer is sold

Northlake Nordic Centre Inc. bought its original groomer on 1 November of year 1 for 96,000 — residual 6,000, six years, straight-line, nearest month: 15,000 a year. On 30 June of year 4 it sells the groomer for 60,000 cash. Four steps, always in this order.

Step 1 — amortise to the date of disposal. Amortization stops when the asset leaves, but it has to be brought up to that day first. At the last year end (31 December of year 3) accumulated amortization was 2,500 (two months of year 1) + 15,000 + 15,000 = 32,500. January to June of year 4 is another 15,000 × 6/12 = 7,500:

Jun 30  Amortization Expense              7,500
            Accumulated Amortization – Equipment     7,500

Accumulated amortization is now 40,000 and the carrying amount 96,000 − 40,000 = 56,000. Skipping this step is the commonest mark loss in the whole family: it leaves the carrying amount at 63,500 and turns the 4,000 gain into a 3,500 loss.

Step 2 — remove the asset: debit Accumulated Amortization for the 40,000 and credit Equipment for the full 96,000 cost. Both accounts must go — the cost and its contra. Step 3 — record the proceeds: debit Cash 60,000. Step 4 — plug the difference: the entry has 100,000 of debits and 96,000 of credits; the 4,000 that balances it is the gain on disposal, a credit. It is not a coincidence that it equals proceeds − carrying amount:

$Gain (loss) = Proceeds - Carrying amount = 60, 000 - 56, 000 = 4, 000$

Jun 30  Cash                              60,000
        Accumulated Amortization – Equipment 40,000
            Equipment                                96,000
            Gain on Disposal                          4,000

Had the buyer paid 51,000, the debits would total 91,000 against 96,000 of credits; the 5,000 plug is a debit, Loss on Disposal. Same four steps; the plug just lands on the other side.

Where the gain goes

A gain on disposal is not revenue — Northlake is not in the business of selling groomers. It sits in other income and expense below income from operations on the multi-step income statement (L6.6), next to interest; a loss sits in the same place. Crediting Service Revenue is wrong in classification and, on a multi-step statement, wrong in every subtotal above the line.

The whole life in one line

There is a check that catches most errors. Over the groomer’s life Northlake paid 96,000 and got 60,000 back: the machine cost it 36,000 to own. The income statements over the same period charged 40,000 of amortization and then credited a 4,000 gain: 36,000. They must agree:

$Cost - Proceeds = Total amortization - Gain 96, 000 - 60, 000 = 40, 000 - 4, 000$

Which is why a gain is not good news and a loss is not bad news: they are the correction for the estimates having been a little off. Had Northlake amortised 44,000 there would have been no gain — and the same 36,000 of total cost. Amortization is the estimate; the gain or loss is the true-up on the day the market names the price.

A van sold at exactly its carrying amount

Bramble Lane Outfitters Ltd. sells a delivery van (Vehicles: cost 38,000, accumulated 30,000 after its own catch-up) for 8,000. Proceeds 8,000 − carrying amount 8,000 = 0: no gain, no loss, and no line for one — Dr Cash 8,000 / Dr Accumulated Amortization – Vehicles 30,000 / Cr Vehicles 38,000. The plug is zero; the four steps still run.

Four steps, always in this order. The first makes the carrying amount right; the last is a plug that equals proceeds less carrying amount — 4,000 gain at 60,000, 5,000 loss at 51,000.