Disposal of Plant Assets: Sell, Exchange, or Discard | Calculation and Recording

1. Long-Term Assets: Plant Assets and Intangibles Chapter 9 Part 2

2. Objective 4 Calculate and record the disposal of plant assets

3. Disposing of a Plant Asset • Sell • Exchange • Discard

4. Disposing of a Plant Asset • Bring depreciation up to date • Compare assets received with book value of asset being disposed of to determine if there is a gain or loss • Gain increases net income – credit balance • Loss decreases net income – debit balance • Record entry to remove asset from books

5. Disposing of a Plant Asset • Gain/Loss depends on accuracy of estimate of residual value • Gain increases net income – credit balance • Often a recovery of depreciation expense • Loss decreases net income – debit balance • May be due to fact that estimated depreciation was not enough.

6. Accumulated Depreciation 2,000 1,500 3,500 balance E9-21 Depreciation for 2007: $10,000 / 5 = $2,000 Depreciation for 2008 (through Sept 30) ($10,000 / 5) x 9/12 = $1,500

7. E9-21 Book Value of Fixtures: Cost $10,000 Accumulated Depreciation 3,500 $6,500 Cash Received (5,000) Loss on sale of fixtures $1,500

8. E9-21 Sep 30 Depreciation Expense 1,500 Accumulated Depreciation 1,500 30 Cash 5,000 Accumulated Depreciation 3,500 Loss on Sale of Fixtures 1,500 Fixtures 10,000

9. Exchanging Plant Assets Market value of new asset Book value of old asset + cash given > “Cost” of the new asset = Sum(Folds basis of old asset into basis of new asset and defers recognition of gain) Must be same type of asset (trade-in)

10. Exchanging Plant Assets Market value of new asset Book value of old asset + cash given < “Cost” of the new asset =Purchase Price Recognize a loss for the difference

11. E9-23 Depreciation Rate: ($350,000 - $100,000) / 1,000,000 miles = $0.25 per mile Depreciation Expense: 2006: $0.25 x 80,000 miles = $20,000 2007: $0.25 x 120,000 miles = 30,000 2008: $0.25 x 160,000 miles = 40,000 2009: $0.25 x 40,000 miles = 10,000 Total accumulated depreciation $100,000

12. E9-23 Book value of old truck: Cost $350,000 Accumulated depreciation (100,000) $250,000 Cash paid 50,000 Cost of new truck $300,000 If new truck was purchased for more than $300,000, then basis of new truck is $300,000. Defers gain

13. E9-23 Book value of old truck: Cost $350,000 Accumulated depreciation (100,000) $250,000 Cash paid 50,000 Cost of new truck $300,000 If new truck was purchased for less than $300,000, then basis of new truck is fair market value (price paid). Recognize the loss