Disposal of plant assets refers to the process of selling, discarding, or trading in equipment and other physical assets that are no longer useful to a business. The disposal of plant assets is an important aspect of managing and maintaining control over a company's assets.
There are three main methods of disposing plant assets: discarding as worthless, selling, and trading in on a new asset. When a plant asset is discarded as worthless, it is no longer of any use to the business and cannot be sold or traded. If the asset is fully depreciated, the plant asset account is credited for the original cost of the item and the accumulated depreciation account is debited for the total accumulated depreciation. If the asset is not fully depreciated, the business incurs a loss equal to the carrying value of the asset.
If a plant asset is sold, the business receives cash in exchange for the asset. The amount of cash received may be equal to, greater than, or less than the book value of the asset. If the cash received is equal to the book value, no gain or loss is realized. If the cash received is greater than the book value, the difference between the two amounts is recorded as a gain. If the cash received is less than the book value, the difference between the two amounts is recorded as a loss.
Finally, plant assets can also be traded in on a new asset. When a plant asset is traded in, it is exchanged for a new asset rather than being sold for cash. The difference between the cost of the new asset and the book value of the old asset is recorded as a gain or loss. If the cost of the new asset is greater than the book value of the old asset, then there is a loss. If the cost of the new asset is less than the book value of the old asset, then there is a gain. The journal entry to record the trade-in of a plant asset is similar to the journal entry for the sale of an asset, with the exception that the cash received is replaced with the new asset being acquired.
For example, if a company trades in its old equipment with a book value of $10,000 for a new piece of equipment with a cost of $12,000, the journal entry would be:
Debit: Accumulated Depreciation, Equipment (old) - $10,000 Debit: Loss on disposal of plant asset - $2,000 Credit: Equipment (new) - $12,000
This entry records the disposal of the old equipment and the acquisition of the new equipment. The loss on disposal of the old equipment is recognized because the cost of the new equipment is greater than the book value of the old equipment.
In summary, the disposal of a plant asset involves either discarding the asset as worthless, selling the asset for cash, or trading it in for a new asset. The specific journal entry to record the disposal depends on the value of the asset at the time of disposal and the method of disposal. It is important to properly record the disposal of plant assets in order to accurately reflect the financial position of the business.