Fixed assets are long-term tangible assets that are used in the operations of a business. Examples of fixed assets include machinery, equipment, vehicles, buildings, etc. Fixed assets are subject to depreciation, which is the process of allocating the cost of the asset over its useful life. Depreciation reduces the book value of the asset and also affects the income statement as an expense.
However, sometimes fixed assets may lose their value due to factors such as obsolescence, damage, impairment, or disposal. In such cases, the book value of the asset may be higher than its fair value, which is the amount that the asset can be sold for in the market. This difference between the book value and the fair value is called a loss in the value of the fixed asset. Accounting for this loss requires adjusting the book value of the asset to match its fair value and recognizing the loss as an expense in the income statement.
Procedures
The following steps describe how to account for loss in the value of fixed assets using Excel formula:
- Determine the fair value of the fixed asset. This can be done by using market prices, appraisal values, discounted cash flows, or other methods.
- Compare the book value of the fixed asset with its fair value. The book value is the original cost of the asset minus the accumulated depreciation. If the book value is higher than the fair value, then there is a loss in the value of the fixed asset. If the book value is lower than or equal to the fair value, then there is no loss in the value of the fixed asset.
- Calculate the amount of the loss by subtracting the fair value from the book value. This is the amount that needs to be adjusted in the balance sheet and the income statement.
- Reduce the book value of the fixed asset by the amount of the loss. This can be done by crediting the fixed asset account and debiting the accumulated depreciation account. This will bring the book value of the asset in line with its fair value.
- Recognize the loss as an expense in the income statement. This can be done by debiting the loss on fixed asset account and crediting the income summary account. This will reduce the net income of the business by the amount of the loss.
Explanation
To illustrate the above procedures, let us consider a scenario where a company has a machine that was purchased for $10,000 and has a useful life of 10 years. The company uses the straight-line method of depreciation, which means that the annual depreciation expense is $1,000. At the end of the fifth year, the company finds out that the machine has become obsolete and can only be sold for $2,000. The company decides to account for the loss in the value of the fixed asset using Excel formula.
The following table shows the calculation of the book value, the fair value, and the loss in the value of the machine using Excel formula:
Table
| Description | Formula | Result |
|---|---|---|
| Original cost of the machine | =10000 | 10000 |
| Accumulated depreciation at the end of the fifth year | =1000*5 | 5000 |
| Book value of the machine | =B2-B3 | 5000 |
| Fair value of the machine | =2000 | 2000 |
| Loss in the value of the machine | =B4-B5 | 3000 |
The following journal entries show how to adjust the book value of the machine and recognize the loss in the value of the fixed asset using Excel formula:
Table
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Accumulated Depreciation | =B6 | |
| Machine | =B6 | ||
| Loss on Fixed Asset | =B6 | ||
| Income Summary | =B6 |
The following table shows the effect of these journal entries on the balance sheet and the income statement using Excel formula:
Table
| Account | Before Adjustment | Adjustment | After Adjustment |
|---|---|---|---|
| Machine | =B2 | =-B6 | =B2-B6 |
| Accumulated Depreciation | =B3 | =B6 | =B3+B6 |
| Net Fixed Assets | =B2-B3 | 0 | =B2-B3 |
| Loss on Fixed Asset | 0 | =B6 | =B6 |
| Net Income | =10000 | =-B6 | =10000-B6 |
Other Approaches
There are other methods of depreciation that can be used to calculate the book value of the fixed asset, such as the sum of the years’ digits method, the declining balance method, the double-declining balance method, and the units of production method. Excel has built-in functions for these methods, such as SYD, DB, DDB, and UOP. However, the procedure for accounting for loss in the value of fixed assets remains the same regardless of the depreciation method used. The only difference is the amount of the accumulated depreciation and the book value of the fixed asset.
