Financial Accounting: In an Economic Context

DISPOSAL: RETIREMENTS, IMPAIRMENTS, SALES, AND TRADE-INS

Long-lived assets are acquired at cost, amortized as they are used in the operation of a business, and eventually disposed of. The disposal can take one of three forms: retirement, sale, or trade-in. The accounting procedures followed in all three cases have much in common. The depreciation is recorded to the date of the disposal, the cost and accumulated depreciation (or net cost, as in the case of intangibles and natural resources) of the long-lived asset are removed from the books, and any receipt or payment of cash or other assets is recorded when the asset is disposed of.⁹ A gain or loss on the exchange is recognized in the amount of the difference between the book value of the asset and the net value of the receipt. Such gains and losses are usually found in the “other revenues and expenses” section of the income statement, but some manufacturers report them in cost of goods sold. Consider, for example, the following excerpt from the 2008 annual report of Kimberly-Clark Corporation:

When property is sold or retired, the cost of the property and related accumulated depreciation are removed from the consolidated balance sheet and any gain or loss on the transaction is included in income.

Retirement and Impairment of Long-Lived Assets

It is not unusual for companies to retire, close, or abandon their long-lived assets. Retirement of an asset can be due to obsolescence, the lack of a market for the asset in question, or ...