Abbott Landscaping purchased a tractor at a cost of $42,000 and sold it three years later for $21,600. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $3,000 residual value. Tractors are included in the Equipment account. Required:
1. Record the scale.
2. Assume the tractor was sold for $13,600 instead of $21,600. Record the sale of equipment.

1. Debit Other income/disposal account (p/l)  $42,000

Credit Asset account  $42,000

Being entries to derecognize cost of asset disposed

Debit Accumulated depreciation account  $23,400

Credit Other income/disposal account (p/l)  $23,400

Being entries to derecognize accumulated depreciation of the asset at the date of disposal,

Furthermore,

Debit Cash account  $21,600

Credit Other income/disposal account (p/l)  $21,600

Being entries to record cash receipt from asset disposal

2. Debit Other income/disposal account (p/l)  $42,000

Credit Asset account  $42,000

Being entries to derecognize cost of asset disposed

Debit Accumulated depreciation account  $23,400

Credit Other income/disposal account (p/l)  $23,400

Being entries to derecognize accumulated depreciation of the asset at the date of disposal,

Furthermore,

Debit Cash account  $13,600

Credit Other income/disposal account (p/l)  $13,600

Being entries to record cash receipt from asset disposal

Explanation:

The carrying amount or net book value of an asset is the difference between the historical cost of the asset and the accumulated depreciation. When an asset is disposed, this carrying amount has to be derecognized and the proceed from the sale recognized. The difference between these two amounts is the gain/loss on disposal.

When the amount received from the disposal of an asset is higher than the carrying value of the asset, the company makes a gain on disposal. The proceed from the disposal of an asset may be recorded in the disposal or other income account.

On disposal, the carrying amount of the asset is derecognized by  

Debit Other income/disposal account (p/l)

Credit Asset account  

with the cost of the asset, then,

Debit Accumulated depreciation account

Credit Other income/disposal account (p/l)

With the accumulated depreciation of the asset at the date of disposal,

Furthermore,

Debit Cash account

Credit Other income/disposal account (p/l)

with the amount received from the disposal or sale of the asset

Annual depreciation of asset = (42000 - 3000)/5

= $7800

Accumulated depreciation as at time of disposal

= $7800(3)

= $23,400

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