## What you will learn to do: Journalize entries for disposal of 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, 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.

Gain on the sale of a plant asset results from selling it for more than the book value. Loss on the sale of a plant asset results from selling it for less than the book value.

To get a better idea of the concept of gains and losses, assume you bought a 1909 American Caramel “Shoeless” Joe Jackson baseball card ten years ago for $500,000 and sold it this year for$667,149. You realized a gain on your investment of $167,149 (which is then taxable income to you). If you swap cards with another collector (which may not be a taxable event), giving her your Joe Jackson card in exchange for a 1968 Topps Nolan Ryan/Jerry Koosman combo card, you may not be able to accurately assess whether you came out better off than you were before (gain) or worse off (loss) until you sell the combo card. Therefore, if you sold the combo card for, say,$700,000, your basis (for tax purposes) would be the $500,000 you paid for the Joe Jackson, and your reported gain would be$200,000.

In business, we record (recognize) gains and losses similarly, except instead of using the historical cost as the basis for calculating gains and losses, we use the book value of the asset (the undepreciated amount). In essence, the amount of depreciation expense you recognized to the date of sale increases the amount of gain you will record.

In this section, we discuss accounting for the following:

1. retirement of plant assets without sale (writing it off)
2. sale of plant assets to a third party
3. trading/exchanging old plant assets for new ones