Plant Assets, Natural Resources, and Intangibles

Introduction

Plant assets, also known as property, plant, and equipment (PP&E), are long-lived tangible assets used in the operations of a business. This section focuses on the accounting treatment for the disposal and sale of plant assets, including the necessary steps to update depreciation and record gains or losses.

Analyze the Effect of a Plant Asset Disposal

Accounting for Asset Disposal

When a business disposes of a plant asset, it must first update the asset's depreciation to the date of disposal. This ensures accurate measurement of the asset's final book value and proper recognition of expenses.

• Depreciation Update: Depreciation must be recorded up to the disposal date to reflect the asset's usage.

• Book Value Measurement: The asset's final book value is calculated as cost minus accumulated depreciation.

• Expense Recognition: All depreciation expense up to the disposal date must be recognized in the financial statements.

Example: If a machine is disposed of on June 30, depreciation should be recorded from the beginning of the year to June 30.

Disposing of a Fully Depreciated Asset for No Proceeds

Accounting for Disposal with Zero Residual Value

When an asset is fully depreciated and has no residual value, its book value is zero. Disposal involves removing the asset and its accumulated depreciation from the accounts.

• Asset Cost: The original cost of the asset (e.g., $60,000).

• Accumulated Depreciation: Equals the asset's cost if residual value is zero.

• Journal Entry: Debit Accumulated Depreciation and credit the asset account to remove both from the books.

Example: Disposal entry for a machine costing $60,000 with zero book value:

• Debit Accumulated Depreciation—Machine $60,000

• Credit Machine $60,000

Formula:

Disposing of a Partially Depreciated Asset for No Proceeds

Accounting for Loss on Disposal

If an asset is not fully depreciated and is disposed of for no proceeds, the remaining book value is recognized as a loss.

• Asset Cost: For example, $60,000.

• Accumulated Depreciation: For example, $50,000.

• Book Value: $10,000 ($60,000 - $50,000).

• Loss Recognition: The book value is recorded as a loss on disposal.

Example: FedEx disposes of equipment with a $10,000 book value and no proceeds. The loss is $10,000.

Formula:

Since proceeds are zero, the loss equals the book value.

Selling a Plant Asset

Partial-Year Depreciation

When selling an asset, depreciation must be recorded for the period up to the sale date. This ensures the book value is accurate at the time of sale.

• Depreciation Calculation: Use the straight-line method or other applicable method to determine partial-year depreciation.

• Example: Equipment purchased for $10,000, estimated life of 10 years, no residual value. Annual depreciation is $1,000 ($10,000 / 10).

• Partial-Year Depreciation: For 9 months in 2021: $1,000 × (9/12) = $750.

Formula:

Recording the Sale and Computing Gain or Loss

After updating depreciation, the asset's book value is compared to the sale proceeds to determine gain or loss.

• Book Value at Sale: Cost minus total accumulated depreciation.

• Sale Proceeds: Amount received from the sale (e.g., $7,300).

• Gain or Loss: If proceeds exceed book value, record a gain; if less, record a loss.

Formula:

Example Table: Equipment Sale Computation

Additional info: Table reconstructed from slide data; actual accumulated depreciation for partial year is $750, total $3,750.

Journal Entry for Sale

• Debit Cash for proceeds received

• Debit Accumulated Depreciation for total depreciation

• Credit Equipment for original cost

• Credit Gain on Sale (if applicable) or Debit Loss on Sale

Example: FedEx sells equipment for $7,300 with a book value of $6,250. Gain on sale is $1,050 ($7,300 - $6,250).

Summary Table: Disposal and Sale of Plant Assets