Hello, I'm currently reviewing our auditors adjusting entries and have a question concerning calculating the loss on sale of disposal. If I buy a truck on Jan 1 2014, and it gets into an accident and is written off on June 1 2014, I believe that I would have to calculate the amortization until June 1 2014 before calculating the gain or loss from insurance. The auditors excluded this calculation and I'm not sure that is correct. Sorry for a basic question but it isn't something I deal with very much, and all examples I could find on the internet don't deal with half year calculations. Thanks
Accounting For Loss On Sale Of An Asset
Answers
Technically, you should depreciate it for 6 months then write off the remaining value at the time it is destroyed. Need to ask your auditors why they wrote off the whole amount. (I am assuming they Dr. Loss on Disposal and Cr. Asset Cost.)
Your question also talks about gain or loss for insurance purposes, I think. That is a different question. Book loss (Cost less depreciation) is not necessarily what you would claim for insurance purposes. Typically insurance policies are written for a replacement value less a deductible which would probably be very different from your net book value you wrote off.
So for example. Let's say your Net Book value (cost less depreciation) at time of the wreck was $15,000. You Dr. Gain/Loss on Disposal and adjust the asset and accumulated depreciation accounts for a net Credit of $15,000
However, let's assume you make a claim to your insurance company and the replacement value is $16,000 and you have a $500 deductible. The insurance is going to cut you a check for $15,500. Your entry is Dr. Cash for $15,500 and you Cr. Gain/Loss on Disposal for $15,500. Your Gain/Loss account is now showing a net gain of $500. (Proceeds less net book value - $15,500 minus $15,000)
Your thoughts are correct. I would ask them why they left the Accum Depreciation out. One of our company cars was in a wreck in Oct and we wrote it off and had to account for the Depreciation through the date of the accident.
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Perhaps they are using a half year convention?
My take here is that Depreciation was NOT (from my reading) computed (Jan1-Jun1). The auditors did NOT find it relevant to compute the depreciation if they are going to compute for the gain/loss in the same fiscal year.
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