A company sells a delivery van outright for $9,000 cash to an unrelated buyer. The van has an original cost of $30,000 and accumulated depreciation of $24,000 at the date of sale, so its carrying amount is $6,000. The van was never classified as held for sale, and the sale does not represent a strategic shift that qualifies as a discontinued operation. Under US GAAP, how should the company account for this transaction?
- Record the $9,000 cash received as revenue and continue to depreciate the van's remaining $6,000 carrying amount over its original useful life, because the sale does not qualify as a discontinued operation
- Recognize no gain or loss; instead reduce additional paid-in capital by the $3,000 difference between the cash received and the van's carrying amount, because disposals of property, plant and equipment outside the ordinary course of business bypass the income statement
- Derecognize the van's $30,000 cost and $24,000 of accumulated depreciation, and recognize a $3,000 gain (the $9,000 proceeds less the $6,000 carrying amount) in income from continuing operations, because the disposal is not a discontinued operation
- Recognize a $3,000 loss, because a sale for less than an asset's original cost is always reported as a loss regardless of the asset's accumulated depreciation or carrying amount
Why C? And why not the others?
Correct answer: C. Derecognize the van's $30,000 cost and $24,000 of accumulated depreciation, and recognize a $3,000 gain (the $9,000 proceeds less the $6,000 carrying amount) in income from continuing operations, because the disposal is not a discontinued operation
Under ASC 360-10-40, when a long-lived asset that is not a discontinued operation is sold, the entity derecognizes the asset's cost and related accumulated depreciation and recognizes any gain or loss, measured as the sale proceeds less the asset's carrying amount at the date of sale, in income from continuing operations. Here proceeds of $9,000 exceed the $6,000 carrying amount by $3,000, so a $3,000 gain is recognized and both the cost and accumulated depreciation are removed from the books. The option treating the proceeds as revenue while continuing to depreciate the van is wrong because the van has been sold and no longer exists on the company's books to be depreciated; treating incidental sale proceeds as revenue also misclassifies the nature of the transaction. The option routing the difference through additional paid-in capital fabricates an equity treatment that has no basis for an ordinary asset disposal; gains and losses on the sale of long-lived assets flow through the income statement, not equity. The option asserting that any sale below original cost is automatically a loss ignores that gain or loss recognition depends on comparing proceeds to the asset's carrying amount (cost less accumulated depreciation), not its original cost; a fully or substantially depreciated asset can easily be sold above its carrying amount for a gain even while sold below its original cost.
Source: FASB ASC 360-10-40-1 (recognition of gain or loss on sale of a long-lived asset not classified as a discontinued operation)