How do you calculate the gain or loss on disposal of a long-lived asset, and where does it appear on the income statement?

When a company sells or disposes of a long-lived asset, the gain or loss is the difference between the sale proceeds and the asset's net book value (NBV) at the date of disposal. This is NOT revenue from operations — it is a separate line item, typically reported as part of other income or other gains/losses.

Formula:

Gain (Loss) on Disposal = Sale Proceeds - Net Book Value

where NBV = Original Cost - Accumulated Depreciation

Worked Example:

Crestline Manufacturing purchased a CNC milling machine on January 1, 2021 for $480,000. The machine has a 10-year useful life and zero salvage value, depreciated straight-line. On July 1, 2026, Crestline sells the machine for $195,000.

Step 1: Calculate accumulated depreciation to date of sale

Annual depreciation = $480,000 / 10 = $48,000/year

From Jan 1, 2021 to Jul 1, 2026 = 5.5 years

Accumulated depreciation = $48,000 x 5.5 = $264,000

Step 2: Determine net book value at disposal

NBV = $480,000 - $264,000 = $216,000

Step 3: Calculate gain or loss

Gain (Loss) = $195,000 - $216,000 = ($21,000) loss

Key points for the exam:

1. Partial-year depreciation — you must depreciate through the disposal date. Many candidates forget the half-year of depreciation in the disposal year.
2. Income statement placement — gains/losses on disposal are typically classified as non-operating items under GAAP. Under IFRS, they appear as other income or other expenses but not as revenue.
3. Cash flow statement — the full $195,000 proceeds appear under investing activities. If using the indirect method for CFO, the $21,000 loss is added back (since it reduced net income but was not an operating cash flow).

Exam trap: If the question says the asset was "scrapped" or "abandoned" with no proceeds, the entire NBV is written off as a loss.

For more FRA disposal scenarios, explore our CFA Level I question bank.