Disposal value in accounting terms is the value of an asset or belonging, at which this asset should be sold or disposed off without incurring any loss to the company. For example, a machine has been installed in a factory and after a useful working on its life period needs to be replaced with a new model. The minimum value at which this machine should be sold without loss is called its book or disposal value.
Disposal of an Asset
Suppose a company has bought a machine for $5000. After serving the company for some year, the machine becomes obsolete and needs replacement. The machine’s book value or disposal value can be calculated by subtracting from original cost, its depreciated cost. For instance, the depreciation value of machine at time of sale is $4000, means its book value is $1000. The company will try to sell the machine at least at its book value. If the machine is sold at a higher value than book value or disposal value it is booked as gain on the sale of machine on the income statement account.
How to calculate disposal Value
For calculation of the disposal value of an asset, it is necessary to get its original cost and depreciated value. There could be different ways to calculate depreciation, two most commonly used methods are Straight line method and units of production method.
- Straight Line Method
It is the easiest and simplest way to calculate the depreciated value of an asset. Simply subtract salvage value of the original cost and dividing the result by the estimated useful life will give you depreciated value. Salvage value is the market or scrap value of that particular asset at the time of disposal. Disposal or book value can be easily calculated by simple subtracting this depreciated value from the original cost.
- Units of Production Method
The units of production method consist of two steps. It differs from the straight line method in a ways that instead of using an estimated number of useful life in years, this method uses estimated useful life in the units.