Disposal of plant assets

All plant assets except land eventually wear out or become inadequate or obsolete and must be sold, retired, or traded for new assets. When disposing of a plant asset, a company must remove both the asset’s cost and accumulated depreciation from the accounts. Overall, then, all plant asset disposals have the following steps in common:

•Bring the asset’s depreciation up to date.

•Record the disposal by:

•Writing off the asset’s cost.

•Writing off the accumulated depreciation.

•Recording any consideration (usually cash) received or paid or to be received or paid.

•Recording the gain or loss, if any.

As you study this section, remember these common procedures accountants use to record the disposal of plant assets. In the paragraphs that follow, we discuss accounting for the (1) sale of plant assets, (2) retirement of plant assets without sale (write it off) , and (3) trading plant assets.  Watch this video to demonstrate the first 2:

Sale of plant assets

Companies frequently dispose of plant assets by selling them. By comparing an asset’s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset’s book value, the company shows a gain. If the sales price is less than the asset’s book value, the company shows a loss. Of course, when the sales price equals the asset’s book value, no gain or loss occurs.

 To illustrate accounting for the sale of a plant asset, assume that a company sells equipment costing  $45,000 with accumulated depreciation of $ 14,000 for $28,000 cash.  The company would realizes a loss of $ 3,000 ($45,000 cost – $14,000 accumulated depreciation is $31,000 book value— $28,000 sales price). The journal entry to record the sale is:

Accounting for depreciation to date of disposal When selling or otherwise disposing of a plant asset, a firm must record the depreciation up to the date of sale or disposal. For example, if it sold an asset on April 1 and last recorded depreciation on December 31, the company should record depreciation for three months (January 1-April 1). When depreciation is not recorded for the three months, operating expenses for that period are understated, and the gain on the sale of the asset is understated or the loss overstated.

To illustrate, assume that on 2016 August 1, Ray Company sold a machine for  $1,500. When purchased on 2008 January 2, the machine cost $12,000; Ray was depreciating it at the straight-line rate of 10% per year. As of 2015 December 31, after closing entries were made, the machine’s accumulated depreciation account had a balance of  $ 9,600. Before determining a gain or loss and before making an entry to record the sale, the firm must make the following entry to record depreciation for the seven months ended 2016 July 31:

When retiring a plant asset from service, a company removes the asset’s cost and accumulated depreciation from its plant asset accounts. For example, Hayes Company would make the following journal entry when it retired a fully depreciated machine that cost $15,000 and had no salvage value:

Occasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset’s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its cost.

Sometimes a business retires or discards a plant asset before fully depreciating it. When selling the asset as scrap (even if not immediately), the firm removes its cost and accumulated depreciation from the asset and accumulated depreciation accounts. In addition, the accountant records its estimated salvage value in a Salvaged Materials account and recognizes a gain or loss on disposal. To illustrate, assume that a firm retires a machine with a $10,000 original cost and $7,500 of accumulated depreciation. If the machine’s estimated salvage value is $500, the following entry is required:

Sometimes accidents, fires, floods, and storms wreck or destroy plant assets, causing companies to incur losses. For example, assume that fire completely destroyed an uninsured building costing $40,000 with up-to-date accumulated depreciation of $12,000. The journal entry is:

If the building was insured, the company would debit only the amount of the fire loss exceeding the amount to be recovered from the insurance company to the Fire Loss account. To illustrate, assume the company partially insured the building and received $22,000 from the insurance company. The journal entry is: