Lesson 8 of 9Accounting for Assets

Unit 2 · Lesson 8 of 9

Revisions, Disposals and Depletion

Changed estimates are applied to the remaining book value over the remaining life; a disposal first brings amortization up to date, then removes cost and accumulated amortization and records any gain or loss; natural resources are depleted per unit extracted.

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Key things to remember

1Revised amortization $= \frac{Book value - New residual}{Remaining life};$ earlier years are never restated.
2Disposal step 1: record amortization up to the disposal date (nearest month).
3Disposal step 2: debit Accumulated Amortization (full balance), credit the asset (full cost).
4Gain if proceeds > book value (credit); loss if proceeds < book value (debit).
5Exchange: new asset cost = fair value of old asset given up + cash paid.
6Depletion per unit $= \frac{Cost - Residual}{Total estimated units};$ depletion for the year = rate × units extracted.

Amortization is built on guesses: how long an asset will last and what it will be worth at the end. Guesses change. A machine might wear out faster than expected, or be sold years early to make way for a better one. A gravel quarry is not used up by the passage of time at all, but by every truckload removed. This lesson handles the three things that happen after an asset is on the books: revising the estimates, getting rid of the asset, and using up a natural resource.

Revising estimates prospectively

When a business learns that useful life or residual value is different from what it expected, it does not go back and fix earlier years. Those years used the best information available at the time; they were estimates, not errors. Instead the change is applied prospectively: the book value still to be amortized is spread over the life that remains.

Revised amortization = \frac{Book value - New residual}{Remaining useful life}

Binding equipment, bought Jan. 2, 2024	Amount
Cost	$50,000
Original estimate: 10 years, residual $5,000, straight-line	$4,500 a year
Accumulated amortization, Dec. 31, 2026 (3 years)	$13,500
Book value, Jan. 1, 2027	$36,500
New estimate: 8 years in total (5 remaining), residual $3,000
Revised amortization: ($36,500 − $3,000) ÷ 5	$6,700 a year

Past years are left alone. Only 2027 onward use the new $6,700 figure.

VideoRevises useful life and residual value part way through an asset's life and spreads the remaining book value over the years left, with no change to past years.Watch on YouTube

Disposing of a capital asset

An asset can leave the business by being sold, retired (scrapped or discarded) or exchanged for another asset. Every disposal follows the same three steps, and the first one is the one students forget.

Bring amortization up to date. Record amortization from the start of the year to the disposal date (nearest month). Without this, the year's expense is understated and the gain or loss is wrong.
Remove the asset completely. Debit Accumulated Amortization for its full balance and credit the asset account for its full original cost.
Record what was received and any gain or loss. Compare the proceeds with the book value: proceeds above book value give a gain; proceeds below give a loss. A gain is a credit and a loss is a debit, and either one makes the entry balance.

Fig 1Disposal in three steps: update amortization, remove cost and accumulated amortization, then compare proceeds with book value to find the gain or loss.

Lakeshore Print sells its van (cost $60,000, straight-line $10,800 a year from Jan. 2, 2026) on Sept. 30, 2028 for $32,000 cash. Accumulated amortization at Dec. 31, 2027 is $21,600. January to September 2028 is 9 months: $$10, 800 \times \frac{9}{12} = $8, 100$ . Accumulated amortization becomes $29,700, so book value is $$60, 000 - $29, 700 = $30, 300 .$ Proceeds of $32,000 exceed book value by $1,700: a gain.

Date	Account	Debit	Credit
Sept. 30, 2028	Amortization Expense — Vehicles	$8,100
	Accumulated Amortization — Vehicles		$8,100
	To bring amortization up to date before the sale
Sept. 30, 2028	Cash	$32,000
	Accumulated Amortization — Vehicles	$29,700
	Vehicles		$60,000
	Gain on Disposal of Vehicles		$1,700
	To record the sale of the delivery van

Second entry: debits $32,000 + $29,700 = $61,700 equal credits $60,000 + $1,700.

Retirements and exchanges

A retirement is a disposal with no proceeds. A fully amortized asset with no residual value is removed by debiting Accumulated Amortization and crediting the asset for the same amount, with no gain or loss. If book value remains when it is scrapped, that remaining book value is a loss. In an exchange (trade-in), the usual approach is to record the new asset at the fair value of the old asset given up plus the cash paid; the old asset's gain or loss is its fair value minus its book value. A dealer's inflated trade-in allowance does not change the asset's real cost.

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Open the disposal control: choose a sale date and selling price, and watch the catch-up amortization, the book value and the gain or loss update.

Fig 2Accumulated Amortization — Vehicles grows by a credit every year and is cleared by one debit when the van is disposed of.

VideoBrings amortization up to date, removes the asset and its accumulated amortization, and compares the cash received with book value to find the gain or loss.Watch on YouTube

Depletion of natural resources

A natural resource such as a timber stand, a mine or a gravel quarry is used up by extraction, not by time. So its cost is allocated with a per-unit rate, exactly like units-of-output amortization. This allocation is called depletion. Residual value here is what the land will be worth after the resource is gone.

Depletion per unit = \frac{Cost - Residual value}{Estimated total units}

Depletion follows the resource to the customer

Depletion becomes part of the cost of the resource extracted. If all of it is sold in the year, the whole amount is expensed (Depletion Expense, or part of cost of goods sold). If some is still on hand at year-end, that share of depletion stays in inventory until it is sold. The resource is reported on the balance sheet at cost less Accumulated Depletion.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

Lakeshore Print's binding equipment cost $50,000 on Jan. 2, 2024, with a $5,000 residual value and a 10-year life (straight-line). In January 2027, management decides the equipment will last 8 years in total, with a residual value of $3,000. Calculate 2027 amortization and record it.

Example 2

Lakeshore Print's van cost $60,000 on Jan. 2, 2026 and is amortized straight-line at $10,800 a year (accumulated amortization $21,600 at Dec. 31, 2027). Suppose it is sold on Sept. 30, 2028 for $27,000 cash instead of $32,000. Record the disposal.

Example 3

Lakeshore Print trades in an old press (cost $40,000, accumulated amortization $28,000, fair value $10,500) for a new press. The dealer lists the new press at $55,000, gives a $14,000 trade-in allowance, and Lakeshore pays $41,000 cash. Amortization on the old press is up to date. Record the exchange on Jan. 2, 2027.

Example 4

A gravel company buys a quarry for $3,200,000 (including legal fees and site preparation). After extraction the land is expected to be worth $200,000. Estimated gravel: 1,500,000 tonnes. In 2026 it extracts 180,000 tonnes. Find 2026 depletion, record it assuming all the gravel was sold, and find the quarry's book value. Then find the split if only 150,000 tonnes had been sold.

Where marks get lost

Selling an asset partway through the year without first recording amortization up to the sale date, which understates expense and distorts the gain or loss.
Removing only the book value from the accounts (crediting the asset for book value) instead of removing the full cost and the full accumulated amortization.
Going back to restate earlier years when an estimate changes. Revisions are prospective: use the current book value and the remaining life.
Recording a traded-in asset's replacement at the dealer's list price instead of at fair value given up plus cash paid.
Expensing all depletion for the year even though some of the extracted resource is still unsold in inventory.

Flashcards 8

Prospective revision

First step of any mid-year disposal

Gain on disposal

Loss on disposal

+ 4 more

Practice

Equipment cost $80,000 with an $8,000 residual value and a 12-year life (straight-line). After 4 years, management revises the remaining life to 5 years and the residual to $6,000. What is the revised annual amortization, to the nearest dollar?

Equipment cost $24,000 and is amortized straight-line at $3,000 a year. Accumulated amortization at Dec. 31, 2026 is $15,000. It is sold June 30, 2027 for $6,800. What is the loss on disposal, to the nearest dollar? (Enter a positive number.)

A business trades in old equipment (cost $30,000, accumulated amortization $21,000, fair value $7,000) and pays $38,000 cash for new equipment. At what cost should the new equipment be recorded, to the nearest dollar?

A timber stand costs $1,800,000; the land will be worth $300,000 after harvesting. Estimated timber: 750,000 cubic metres. This year 90,000 cubic metres are harvested. What is this year's depletion, to the nearest dollar?

A machine is sold on Aug. 31. The last amortization entry was at Dec. 31 of the previous year. What must be recorded first?

A fully amortized computer (cost $9,600, no residual value) is thrown away. What is the entry?

Why are changes in useful life or residual value applied prospectively instead of correcting earlier years?

Put the steps for recording the sale of a capital asset partway through the year in order.

1Record the difference as a gain (credit) or a loss (debit)
2Debit Cash and Accumulated Amortization, credit the asset at cost
3Compare the proceeds with the book value
4Record amortization from the start of the year to the date of sale
5Find the updated accumulated amortization and book value

Match each disposal situation to its result.

Proceeds greater than book value

Proceeds less than book value

Proceeds equal book value

Asset scrapped with book value remaining

What is the name for allocating the cost of a natural resource such as a mine or timber stand?

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