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Retirement Method and Replacement Method

The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

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713 views1 page

Retirement Method and Replacement Method

The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

Uploaded by

Queenie Valle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Retirement Method and Replacement method

Under retirement method of depreciation, no depreciation is recorded until the asset is


retired. The amount of depreciation is equal to the original cost of the asset retired
minus salvage proceeds.

Under replacement method of depreciation, no depreciation is recorded until the asset is


retired and replaced. The amount of depreciation is equal to the replacement cost of the
asset retired, minus salvage proceeds.

Illustration
The following data relate to the tools account for the current year.

Balance- January 1, 1,000 units at P50 per unit 50,000


Acquisition – 2,500 units at P70 per unit 175,000
Retirement tools- 1,200
Proceeds from retirement of tools 5,000

Necessary entries are as follows: Retirement method


1. To record the acquisition:

Tools 175,000
Cash 175,000

2. To record the retirement:

Cash 5,000
Depreciation 59,000
Tools64,000

Cost of tools retired (FIFO)


1,000 units x 50 50,000
200 units x 70 14,000
1,200 64,000

Necessary entries are as follows: Replacement method


1. To record the acquisition in excess of the retirement (2,500 – 1,200 = 1,300)

Tools (1,300 x 70) 91,000


Cash 91,000

2. To record the replacement of the tools retired:

Depreciation 79,000
Cash 79,000

Replacement cost of tools retired (1,200 x 70 ) 84,000


Proceeds from retirement (5,000)
Depreciation 79,000

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