According to its depreciation, many companies contain an asset disposal policy to replace equipment. When companies sell this equipment it gains a salvage value or residual value which can be a gain or a loss per the books. You must submit his gain or loss for disposal assets accounting on the income statement as a part of net income. It should also be noted that the company will need to reduce the amount of value left with the asset if it was not reduced to zero per depreciation.
For example, Stitch Company is a textile manufacturer specializing in t-shirts, but provides other textile services as well. Stitch Co. equipment used to make the t-shirts and other clothing products. Note that these products only have a useful life of five years. Currently, there is one piece of equipment which has broken down. After assessing the damage, Stitch Company maintenance staff has confirmed that it would be cheaper. In addition it would be more efficient for production to sell and replace the equipment.
The company uses the straight line method of depreciation, and the original cost of the equipment is $20,000. The depreciation on the equipment is equal to $15,000 or 4 years of depreciation. Stitch was able to sell the equipment for $6,000. Therefore, Stitch must recognize a gain on the income statement of $1000. If you take the $6,000 sale price and subtract the $5,000 book value of the equipment from it, you will find the gain on the income statement. If the sale price were $4,000, rather than $6,000, you would find a loss of $1,000 listed on the Income Statement.
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