4. Plant Assets - Discarding Plant Assets

What are the 3 ways disposal of plant assets can occur?

Discarding, sale, or exchange

What is the first step in accounting for disposals (disposing of plant assets)?

1. Record depreciation up tot he date of disposal - this also updates Accumulated Depreciation

What is the second step in accounting for disposals (disposing of plant assets)?

2. Record the removal of the disposed asset’s account balances - including its accumulated depreciation.

What is the third step in accounting for disposals (disposing of plant assets)?

3. Record any cash (and/or other assets) received or paid in the deposit.

What is the fourth step in accounting for disposals (disposing of plant assets)?

4. Record any gain or loss - equal to the value of any assets received minus the disposed asset’s book value.

When is a plant asset discarded?

When it is no longer useful to the company and it has no market value.

When is a plant asset said to be fully depreciated (zero book value)?

When accumulated depreciation equals the asset's cost.

What is the entry to record discarding of a plant asset?

debit Accumulated Depreciation - Account name, credit Account name

• This reflects step 2 in accounting for disposals (record the removal of the disposed asset’s account balances - including its accumulated depreciation).

Review explanation under first picture under discarding plant assets.

What is the entry to record step 1 in accounting for disposals? (if the asset is not fully depreciated or one whose depreciation is not up-to-date)?

debit Depreciation expense, credit accumulated depreciation - account name.

This brings the depreciation up-to-date. We debit and credit the calculated depreciation expense for how long we had it this year before it was discarded. This is calculated by taking the yearly depreciation expense and multiplying by number of months / 12.

What is the entry to record step 2-4 in accounting for disposals? (if the asset is not fully depreciated or one whose depreciation is not up-to-date)?

debit Accumulated Depreciation - Account name, debit Loss on Disposal of Account name, credit Account name.

• This entry takes care of steps 2-4 in accounting for disposals.

How do we compute loss on disposal of the plant asset?

By comparing the equipment’s book value with the net cash proceeds.

How is the loss reported in financial statement?

The loss is reported in the Other Expenses and Losses section of the income statement.

Review

Discarding an asset can sometimes require a cash payment that would increase the loss.

Review all examples under discarding plant assets since this is kind of confusing with just flash cards.

How many steps are needed to account for selling plant assets (not discarding)?

4 steps, the same 4 steps as discarding of plant assets.

What is the entry for step 1 when selling plant assets?

debit Depreciation expense, credit Accumulated Depreciation - Equipment

This records the depreciation expense and updates the accumulated depreciation so far for the current year (multiply the year’s depreciation expense by months / 12)

Review

Steps 2 through 4 need one final entry that depends on the amount received from the sale. We cover three different possibilities.

What is the entry if we sell at book value?

debit Cash for amount received (book value), credit Accumulated Depreciation - Equipment for accumulated depreciation, credit Equipment for full cost

Is there a gain or loss if we sell at book value?

No, so we don’t need an entry for gain/loss on disposal of equipment.

Review example under sale at book value.

What is the entry to record selling above book value?

debit Cash for amount received, debit Accumulated depreciation amount, credit Gain on Disposal of Equipment for amount that is above the book value, credit Equipment for full cost.

Does Gain on Disposal of Equipment have a normal credit or debit balance?

Credit.

Review example under Sale above book value.

What is the entry to record selling the plant asset below book value?

debit Cash for amount received, debit Loss on Disposal of Equipment for amount under book value, debit Accumulated Depreciation for amount, credit Equipment for cost.

Does Loss on Disposal of Equipment have a normal debit or credit balance?

Normal debit balance

Review Need-To-Know 10-3