hho8e_ch09_preview.ppt

* Eventually, an asset wears out or becomes obsolete. The owner then has different choices. The owner can sell or scrap the asset, or trade it in for an asset that is not similar in functionality. Examples include selling a Ford truck for cash, scrapping a Toyota truck for no cash, or trading a truck for a copier machine. All are non-like property exchanges and a gain or loss on the transaction must be recognized by the company. Another scenario involves trading the asset for another asset that has similar functionality. This is called a like-kind exchange. No gain or loss is recognized on like-kind exchanges. An example of a like-kind asset exchange would be trading a Ford truck for a Chevy truck. * Regardless of the type of exchange (like or non-like kind property), the four steps for journalizing disposals or trades are similar and are as follows: 1. Bring the depreciation up to date. 2. Remove the old, disposed-of asset from the books. a. Make the Asset account equal zero by crediting the asset for its original cost. b. Make the Accumulated depreciation account for the asset equal zero by debiting it for all the depreciation taken to date on the asset. 3. Record the value of any cash (or other accounts) paid (or received) for the asset. For example, if cash is given, credit Cash. If cash is received, debit Cash. If a notes payable was signed, credit Notes payable. 4. Finally, determine the difference between the total debits and total credits made in the journal entry. If the asset was traded for a like-kind asset, the net difference in debits and credits will be recorded as a debit to the new asset account. If the asset was traded in a non-like-kind manner, then the net difference will represent gain or loss on the disposal (or sale) of the disposed asset Record the gain or loss flow to the Income Statement as follows: ? If the total debits total credits---a credit entry will be made to make the journal entry balance. The credit represents a Ga