Plant Asset Disposals, Natural Resources, and Intangible Assets

This chapter details the events that need to be dealt with when disposing assets. There are balance sheet and income statement entries that must be recorded when getting rid of equipment by scrapping it or selling it. It also discusses intangible assets, how to record them, and how to account for their diminishing value. Many business entities will eventually have to dispose of a plant asset. When this happens, the company will either have a loss or show a gain depending on the difference between the asset's sale price and its book value. You will learn the journal entries for a variety of situations, including a gain on the sale of an asset, a loss on the sale of an asset, how to realize loss, and what to do when a fire or flood that destroys an asset.

Disposal of plant 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, then, all plant asset disposals have the following steps in common:

  • Bring the asset's depreciation up to date.
  • Record the disposal by:

(a) Writing off the asset's cost.

(b) Writing off the accumulated depreciation.

(c) Recording any consideration (usually cash) received or paid or to be received or paid.

(d) Recording the gain or loss, if any.

As you study this section, remember these common procedures accountants use to record the disposal of plant assets. In the paragraphs that follow, we discuss accounting for the (1) sale of plant assets, (2) retirement of plant assets without sale, (3) destruction of plant assets, (4) exchange of plant assets, and (5) cost of dismantling and removing plant assets.