Journal Entry
1. Understand the need to record depreciation for the current period prior to the disposal of property or equipment.
2. Construct the journal entry to record the disposal of property or equipment and the recognition of a gain or loss.
3. Explain the half-year convention and the reason that it is frequently used by companies for reporting purposes.
Question: Property and equipment are occasionally sold before the end of their estimated lives. A company’s
operational needs might change or officials could want the benefit of a newer or more efficient model. What
accounting is necessary in the event that a piece of property or equipment is sold prior to the conclusion of its
useful life? In the above example, assume that after the adjusting entry for depreciation is made on December 31,
Year Two, the building is sold for $290,000 cash. How is that transaction recorded?
Answer: Accounting for the disposal of property and equipment is relatively straightforward.
First, to establish account balances that are appropriate at the date of sale, depreciation is recorded for the period
of use during the current year. In this way, the expense is matched with any revenues earned in the current period.
Second, the amount received from the sale is recorded while the book value of the asset (both its cost and
accumulated depreciation) is removed. If the owner receives less for the asset than this book value, a loss is
recognized for the difference, which decreases reported net income. If more is received than book value, the
excess is recorded as a gain so that net income increases.
