Question

When an asset being depreciated under the group method is disposed of, which of the following happens to any resulting gain or loss?

A. It is buried in the Depreciation Expense account.
B. It is buried in the Accumulated Depreciation account.
C. It is recorded as a loss.
D. It is recorded as a gain.

Answer 1

When disposing of an asset within the group method of depreciation, the gain or loss is not buried in any accounts but is rather recorded as a separate transaction in the income statement, reflecting the difference between the disposal proceeds and the net book value of the asset.

Step-by-step explanation:

When depreciating assets under the group method, any gain or loss from the disposal of an asset is usually dealt with by removing the asset's cost and its associated accumulated depreciation from the balance sheet, and recording any remaining balance as a gain or loss in the income statement. This gain or loss is the difference between the proceeds from the sale and the net book value (cost less accumulated depreciation) of the disposed asset. So, the options presented in the question are misleading because a gain or loss from asset disposal should be recorded either as a separate line item on the income statement or disclosed in the notes, depending on the materiality of the transaction.

The correct treatment would be to:

1. 
   
3. Deduct the original cost of the disposed asset from the group of assets.
4. 
   
6. Credit the accumulated depreciation account for the disposed asset's contribution to that pool.
7. 
   
9. Compare the asset’s net book value to the proceeds from disposal.
10. 
    
12. Record any difference as a gain if the proceeds exceed the net book value, or as a loss if the net book value exceeds the proceeds.