The journal entry to retire old equipment that is not fully depreciated includes a:

Learning Outcomes

• Journalize entries for discarding of plant assets

When retiring a plant asset from service, a company removes the asset’s cost and accumulated depreciation from its plant asset accounts. For example, Hassan Company would make the following journal entry when it disposed of a fully depreciated machine that cost $15,000 and had no salvage value:

The asset would also be removed from the fixed asset list (subsidiary ledger) since it no longer physically exists (except maybe as a rusting piece of junk in the junkyard).

Occasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset’s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its depreciable cost (historical cost − salvage value).

Sometimes a business retires or discards a plant asset before fully depreciating it. When selling the asset as scrap (even if not immediately), the firm removes its cost and accumulated depreciation from the asset and accumulated depreciation accounts. In addition, the accountant records its estimated salvage value in a Salvaged Materials account and recognizes a gain or loss on disposal. To illustrate, assume that a firm retires a machine with a $10,000 original cost and $7,500 of accumulated depreciation. If the machine’s estimated salvage value is $500, the following entry is required:

Sometimes accidents, fires, floods, and storms wreck or destroy plant assets, causing companies to incur losses. For example, assume that fire completely destroyed an uninsured building costing $40,000 with up-to-date accumulated depreciation of $12,000. The journal entry is:

If the building was insured, the company would debit only the amount of the fire loss exceeding the amount to be recovered from the insurance company to the Fire Loss account. To illustrate, assume the company partially insured the building and received $22,000 from the insurance company. The journal entry is:

Here is an overview of the process:

You can view the transcript for “Disposing of Depreciated Assets (part 1 of 2)” here (opens in new window).

We’ll next learn how to journalize entries for sale of assets.

practice question

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Oracle Assets creates journal entries for the retirement accounts you set up in the Book Controls window. If you enter distinct gain and loss accounts for each component of the gain/loss amount, Oracle Assets creates multiple journal entries for these accounts. You can enter different sets of retirement accounts for retirements that result in a gain and retirements that result in a loss.

Depreciation for Retirements

Oracle Assets reverses the year-to-date depreciation if the asset's depreciation method does not depreciate it in the year of retirement. In this case, when you perform a full retirement, Oracle Assets reverses the year-to-date depreciation of the asset, and computes the gain or loss using the resulting net book value. For partial retirements, Oracle Assets reverses the appropriate fraction of the year-to-date depreciation and computes the gain or loss using the appropriate fraction of the resulting net book value.

If the depreciation method takes depreciation in the year of retirement, Oracle Assets uses your retirement convention to determine whether the asset is eligible for additional depreciation in that year or whether some of that year's depreciation must be reversed.

When you perform a partial retirement, Oracle Assets depreciates the portion of the asset you did not retire based on the method you use. If your depreciation method multiplies a flat-rate by the cost, Oracle Assets depreciates the asset's cost remaining after a partial retirement. For assets that use a diminishing value method, Oracle Assets depreciates the remaining fraction of the asset's net book value as of the beginning of the fiscal year.

Depreciation for Reinstatements

When you reinstate a retired asset, Oracle Assets usually calculates some additional depreciation expense in the period in which you perform the reinstatement, unless you perform it in the same period that you retired the asset. This additional depreciation is the depreciation that would have been taken if you had not retired the asset.

Sometimes, however, a reinstatement results in a reversal of depreciation. This occurs if the retirement convention caused some additional depreciation when you retired the asset, and then you reinstate the asset before the retirement prorate date. Then Oracle Assets reverses the extra depreciation that it took at retirement, and waits until the appropriate accounting periods to take it.

Current Period Retirements

If you enter the same account for each gain and loss account, Oracle Assets creates a single journal entry for the net gain or loss.

Prior Period Retirement

Current Period Reinstatement

Oracle Assets also creates journal entries to recover the depreciation not charged to the asset and for the current period depreciation expense.

Prior Period Reinstatement

Assets Fully Reserved Upon Addition

Non-Depreciated Capitalized/Construction-In-Process (CIP) Assets

Reinstatement Transactions

PENDING Asset Retirement

PROCESSED Asset Retirement

See Also

Retiring Assets

Correcting Retirement Errors (Reinstatements)

Calculating Gains and Losses for Retirements

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