Occasionally, a company continues to use a plant asset after it has been fully depreciated. All plant assets except land eventually wear out or become inadequate or obsolete and must be sold, retired, or traded for new assets. Since the $4,000 of cash received by the company was greater than the van’s book value of $1,400, there is a gain on the sale of the van of $2,600 ($4,000 minus $1,400).
If the cash received is less than the asset’s book value, the difference is recorded as a loss. If the cash received is greater than the asset’s book value, the difference is recorded as a gain. 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.
As of the time of the disposal, the equipment’s accumulated depreciation is $195,000. Let’s look at two scenarios for the sale of an asset. 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.
- Companies frequently dispose of plant assets by selling them.
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- Therefore, the van’s book value as of March 31 was $1,400 (cost of $45,000 minus accumulated depreciation of $43,600).
- To illustrate, assume that on August 1, 2016, Okoro Company sold a machine for $1,500.
- When retiring a plant asset from service, a company removes the asset’s cost and accumulated depreciation from its plant asset accounts.
- As you study this section, remember these common procedures accountants use to record the disposal of plant assets.
Is the sale of a plant asset recorded in the sales account?
To illustrate, assume that on 2016 August 1, Ray Company sold a machine for $1,500. •Recording any consideration (usually cash) received or paid or to be received or paid. The credit of $2,600 will result in the entry having debits of $47,600 and credits of $47,600. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
Definition of Gain or Loss on Sale of an Asset
If the sales price is greater than the asset’s book value, the company shows a gain. 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. In order to know the asset’s book value at the time of the sale, the depreciation expense for the asset must be recorded right up to the date that the asset is sold. When an asset is sold or scrapped, a journal entry is made to remove the asset and its related accumulated depreciation from the book. 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.
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. 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. 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. When selling or otherwise disposing of a plant asset, a firm must record the depreciation up to the date of sale or disposal. Of course, when the sales price equals the asset’s book value, no gain or loss occurs. The asset is credited, accumulated depreciation is debited, cash in debited, and the gain or loss is recorded as either revenue (gain) or expense (loss) using an account called Gain or Loss on Sale of an Asset.
As of 2015 December 31, after closing entries were made, the machine’s accumulated depreciation account had a balance of $ 9,600. •Writing off the accumulated depreciation. As of December 31, 2015, after closing entries were made, the machine’s accumulated depreciation account had a balance of $9,600. This $5,000 loss (cash received of $10,000 minus book value of $15,000) is reported on the income statement as a separate item.
When purchased on January 2, 2008, the machine cost $12,000; the machine was depreciating at the straight-line rate of 10% per year. To illustrate, assume that on August 1, 2016, Okoro Company sold a machine for $1,500. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Often this loss appears in the income statement section entitled Other or Nonoperating.
Sale of Plant Assets quiz #1 Flashcards
- 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.
- When an asset is sold or scrapped, a journal entry is made to remove the asset and its related accumulated depreciation from the book.
- To illustrate, assume that on 2016 August 1, Ray Company sold a machine for $1,500.
- But what if a company exchanges an asset instead of selling it?
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- Instead, XYZ remove’s the equipment’s cost of $210,000 and the related accumulated depreciation of $195,000.
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. As you study this section, remember these common procedures accountants use to record the disposal of plant assets. The $10,000 of proceeds from the sale of the plant asset is also reported as a positive amount in the investing activities section of the statement of cash flows.
For example, if the firm 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). The sale of a plant asset is often the disposal of a company’s equipment (or other asset) that had been used in the company’s business operations. In addition, the accountant records its estimated salvage value in a Salvaged Materials account and recognizes a gain or loss on disposal. 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. 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).
How to Calculate Straight Line Depreciation
•Bring the asset’s depreciation up to date. Therefore, the van’s book value as of March 31 was $1,400 (cost of $45,000 minus accumulated depreciation of $43,600). But what if a company exchanges an asset instead of selling it? Instead, XYZ remove’s the equipment’s cost of $210,000 and the related accumulated depreciation of $195,000. Since XYZ is not in the business of buying and selling equipment, this sale of equipment is a “peripheral” activity and is not reported as part of its sales revenue.
When an asset is sold for less than its Net Book Value, we have a loss on the sale of the asset. When an asset is sold for more than its Net Book Value, we have a gain on the sale of the asset. At the end of Year 3, the Balance Sheet shows the cost of the asset, the amount of accumulated depreciation for the asset, and the net book value. Sometimes how to make entries for purchase accidents, fires, floods, and storms wreck or destroy plant assets, causing companies to incur losses. To illustrate, assume that a firm retires a machine with a $10,000 original cost and $7,500 of accumulated depreciation.
Adjusting Journal Entries Accounting Student Guide
When retiring a plant asset from service, a company removes the asset’s cost and accumulated depreciation from its plant asset accounts. 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). When disposing of a plant asset, a company must remove both the asset’s cost and accumulated depreciation from the accounts. If the sales price is less than the asset’s book value, the company shows a loss.
The van’s original cost was $45,000 and its accumulated depreciation was $43,600 as of the date of the sale. Companies frequently dispose of plant assets by selling them. (The Sales account is used for recording sales of products in the company’s main business operations.) Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. For example, assume that fire completely destroyed an uninsured financial statement analysis definition building costing $40,000 with up-to-date accumulated depreciation of $12,000. Sometimes a business retires or discards a plant asset before fully depreciating it.
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