Disposition of Accounts Receivable

This effect is motivated by loss aversion, meaning our resistance to realizing losses even if it is a more profitable move. The disposition effect is also strengthened by keeping mental accounts, seeking pride, and fear of regret. Suppose a $90,000 delivery truck with a net book value of $10,000 is exchanged for a new delivery truck.

Gains on dissimilar exchanges are recognized when the transaction occurs. The cost of the new truck is $101,000 ($95,000 cash + $6,000 trade‐in allowance). If the truck sells for $15,000 when its net book value is $10,000, a gain of $5,000 occurs. The sale is recorded by debiting accumulated depreciation‐vehicles for $80,000, debiting cash for $15,000, crediting vehicles for $90,000, and crediting gain on sale of vehicles for $5,000. If the entire cost of an asset has been depreciated before it is retired, however, there is no loss.

What Is a Disposition?

Typically, companies realize a gain or loss on the disposition of plant and equipment. In theory, that loss or gain should have been reflected on the income statement during the asset’s serviceable life. In practice, the gain or loss appears in the current accounting period. The financial accounting term https://accounting-services.net/disposition-of-property-plant-and-equipment/ disposition of property, plant, and equipment refers to the disposal of the company’s assets. This can include the sale, exchange, abandonment, and involuntary termination of the asset’s service. Disposition of plant typically results in a gain or loss appearing on the company’s income statement.

• It is simply the transfer of an asset’s ownership, where the asset is either given away or sold.
• These results show how the disposition effect can determine whether a firm sinks, or swims.
• The cost of the new truck is $101,000 ($95,000 cash + $6,000 trade‐in allowance).
• The gain or loss is calculated as the net disposal proceeds, minus the asset’s carrying value.

For the purposes of this discussion, we will assume that the asset being disposed of is a fixed asset. By transferring receivables to another party, the company reduces the sales to cash revenue cycle time. Also known as disposition and transfers of accounts receivable, this process provides additional cash to the business, which can be used in operations or to purchase additional assets. Disposing of accounts receivable also relieves companies of the burden of creating and staffing additional resources in their billing and collections department. However, smart decision-making and good financial performance must be grounded in a comprehensive point of view, rather than an outlook of one-off wins and losses. A keen investor would cut their losing assets over selling assets that will likely continue “winning”.

Hello and welcome to Viewpoint

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 the 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.

Gains on similar exchanges are handled differently from gains on dissimilar exchanges. On a similar exchange, gains are deferred and reduce the cost of the new asset. For example, after receiving a $12,000 trade‐in allowance on a delivery truck with a net book value of $10,000 and paying $89,000 in cash for a new delivery truck, the company records the cost of the new truck at $99,000 instead of $101,000. The $99,000 cost of the new truck equals the $12,000 trade‐in allowance plus the $89,000 cash payment minus the $2,000 gain. Since the $12,000 trade‐in allowance minus the $2,000 gain equals the old truck’s net book value of $10,000, however, it is easier to think of the $99,000 cost as being equal to the old truck’s net book value of $10,000 plus the $89,000 paid in cash.

Filter & Search

In certain situations, the threshold level can be increased to 20%. The Securities and Exchange Commission (SEC) has very specific guidelines on how these dispositions must be reported and handled. If the disposition is not reported in the financial statements of a company, then pro forma financial statements are required if the disposition meets the requirements of a significance test.

If they decide to exit the investment, it would amount to a disposition of that investment—a disposition of shares. Most likely, they would sell their shares through a broker on a stock exchange. Ultimately, they have decided to get rid of, or dispose of, that investment. If the investor decides to move out of the investment, he/she will sell his/her shares on the exchange market via a broker. A 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.

Gain on Sale

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. If the company receives a $12,000 trade‐in allowance, a gain of $2,000 occurs. Certain types of assets, particularly vehicles and large pieces of equipment, are frequently exchanged for other tangible assets.

The disposition effect is our tendency to sell winning assets too early and hold on to losing assets for too long. Heimer analyzed data from myfxBook to measure the disposition effect in traders before and after joining trading social networks. Company A would also disclose the use of $100,000 in accounts receivable as collateral in the notes to its financial statements. If the sale results in any sort of capital gain, then the investor will have to pay capital gains tax on the profits of the sale if they meet the requirements set by the Internal Revenue Service (IRS).

Reporting Time Frame and Federal Reserve Bank Action

When there is a gain on the sale of a fixed asset, debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account. When there is a loss on the sale of a fixed asset, debit cash for the amount received, debit all accumulated depreciation, debit the loss on sale of asset account, and credit the fixed asset. The overall concept for the accounting for asset disposals is to reverse both the recorded cost of the fixed asset and the corresponding amount of accumulated depreciation.

George Costanza once said, “My life is the complete opposite of everything I want to be”. Read this piece to find out how this advice can help our decision-making process. A 2016 study by Rawley Heimer showed that investment social networking caused an increase in the disposition effect in traders. Broadframing is a tool that experienced traders use to fight the emotional reactions surrounding gain and loss.

The following journal entry shows a typical transaction where a fixed asset is being eliminated. The asset has an original cost of $10,000 and accumulated depreciation of $8,000. We want to completely eliminate it from the accounting records, so we credit the asset account for $10,000, debit the accumulated depreciation account for $8,000, and debit the disposal account for $2,000 (which is a loss). Suppose the $90,000 truck reaches the end of its useful life with a net book value of $10,000, but the truck is in such poor condition that a salvage yard simply agrees to haul it away for free. The entry to record the truck’s retirement debits accumulated depreciation‐vehicles for $80,000, debits loss on retirement of vehicles for $10,000, and credits vehicles for $90,000. Since depreciation is a function of serviceable life, and not the asset’s market value, it would be rare for the book value of the asset to be equal to its disposal value.