What is Disposition?
Disposition refers to the disposal of assets or securities through assignment, sale, or another transfer method. It is simply the transfer of an asset’s ownership, where the asset is either given away or sold.
Disposition involving assignments and transfers can also be completed for accounting and tax purposes to get relief from any associated taxes or any other liability. It can also refer to the disposal of an asset that is held as a security against a loan.
Disposition occurs in many ways. For example, the sale of stocks or bonds in the exchange market by an investor is called the disposition of stocks. A company reports the insider trades as a disposition of shares to executives and board of directors. When banks review the loans and sell the collateral in the event of default by the borrowers, it is called the disposition of loan assets. Certain types of donations to trusts or charities can also be referred to as a disposition.
- Disposition refers to the disposal of assets through a sale, assignment, or transfer where the ownership of the asset is transferred.
- The sale of shares in the exchange market, insider trades reported in a company’s records, the sale of loan collaterals by banks, and donations are some of the forms of disposition.
- When a company sells an asset by any method of disposition, the related accounts need to be removed from the company books.
Suppose an investor’s been holding some stocks in a particular company. Recently, the company’s not been performing well. If the investor decides to move out of the investment, he/she will sell his/her shares on the exchange market via a broker. Thus, the investor disposes of his/her investment in the company.
Recording a Disposition
When companies decide to discard their assets through an exchange or sale, it is referred to as a disposition. It may also occur when companies need to involuntarily end the life of damaged or stolen assets. However, regardless of the method of disposition, the accounts related to the discarded assets should be removed from the company records.
As an asset’s book value is rarely the same as its market value, companies experience either a loss or gain on the disposition of an asset. Theoretically, the disposition should be reproduced on the company’s income statement during the working life of the asset. However, in practice, the gain or loss associated with the disposition is reflected in the present accounting period.
For example, suppose Company X decides to sell its equipment Z for $75,000. The original cost of the equipment was $100,000, wit the asset being depreciated over three years. The accumulated depreciation on the equipment was $50,000. The profit or loss on the disposition of the equipment will be calculated as below:
Cost of Equipment Z = $100,000
Accumulated Depreciation = $50,000
Net Book Value = $100,000 – $50,000 = $50,000
Proceeds from Sale = $75,000
Gain from the Disposition of Equipment Z = $75,000 – $50,000 = $25,000
The equipment needs to be removed from the company’s records. To do it, $75,000 cash will be debited, and the accumulated depreciation of $50,000 and disposition gain of $25,000 will be credited. The journal entries will be reflected in the present accounting period.
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