How is a gain or loss on disposal of a fixed asset reflected in financial records?

• A. Remove the asset from books, record proceeds, and recognize gain or loss as the difference between proceeds and carrying amount in earnings.
• B. Record gain as revenue and dispose of the asset.
• C. Ignore any gain or loss and keep asset in books.
• D. Record a loss automatically when disposed.

Answer: (A)

When a fixed asset is disposed, you remove the asset and its accumulated depreciation from the books, record the cash or other proceeds, and recognize the difference between the proceeds and the asset’s net book value as a gain or loss in earnings. The net book value is the original cost minus accumulated depreciation. The gain or loss is proceeds minus this net book value.

For example, if an asset cost 1,000 and accumulated depreciation is 800, the net book value is 200. If you sell it for 300, there is a 100 gain that flows through net income. The typical entries would be to debit cash 300 and debit accumulated depreciation 800, then credit the asset 1,000 and credit a 100 gain on disposal. If you sold it for 150, there would be a 50 loss, recorded as a debit to a loss on disposal.

This approach keeps the financial records accurate by removing the asset and its depreciation from the books and reflecting the actual economic result of the disposal in earnings.