Plant Assets Can Be Disposed of by Discarding, Selling, or Exchanging Them.
Unit 5: Disposal of Plant Avails
5.ane Introduction
Then far we have seen how to account for property, found, and equipment assets, from calculating acquisitions toll to depreciating this toll up to the finish of the asset's useful life. Institute assets, such every bit equipment, delivery trucks, or machineries cannot be used forever. The assets may wearable out or the business may supersede them with newer model. When a found nugget is no longer useful to a business the asset may be tending of either through discarding, sale, or traded-in with similar) or dissimilar) assets. This chapter therefore, is presented this concept in detail.
5.ii disposals of plant avails
A plant asset rarely lasts exactly as long as its estimated life. If it lasts longer than its estimated life, it is non depreciated past the bespeak at which its carrying value equals its residue value. The purpose of depreciation is to spread the depreciable cost of the asset over the economic life of the nugget. Thus, the total accumulated depreciation should never exceed the total depreciable toll. If the asset is withal used in the business organization across the end of its estimated life, its cost and accumulated depreciation remain in the ledger accounts. Proper records volition thus be available for maintaining control over constitute assets. If the balance value is zippo, the book value of a fully depreciated nugget is zip until the asset is tending off. If such an asset is discarded, no gain or loss results. A plant asset may be tending by:
(1) Discarding it every bit worthless; (2) Selling it; or (three) Trading it in on a new nugget
5.two.i Recording Discarding of a Plant Asset
If a found asset is of no further use to the business and cannot be sold or traded, then the plant asset is discarded. If the asset has no book value. (i.e., if it is fully depreciated), the institute asset business relationship is credited for the amount of the original price of the particular being discarded. At the same fourth dimension, the accumulated depreciation account is debited for the corporeality of the full accumulated depreciation of the detail being discarded. In this case neither proceeds nor loss is realized. On the other manus, if a institute asset has a book value (if not fully depreciated) at the time it is discarded, the business incurs a loss.
Illustration - 1
Suppose for example, on July 5, year 5, equipment that was acquired On Jan ten, year 1, at a cost of Br. xi,000, is discarded equally worthless. The discarded equipment has a carrying value of Br. 2000 at the time of disposal. The carrying value is computed equally the deviation betwixt the cost of nugget Br. 11,000 and accumulated deprecation, Br. 9000. A loss equal to the carrying value should exist recorded when the equipment is discarded.
Solution:
The journal entry required to discard the establish nugget as of July five, yr five, is:
Yr 5
July v. Accumulated Deprecation, Equipment …………9000.00
Loss on disposal of plant Asset…………………2000.00
Equipment ……………………………….11000.00
Discarding Equipment no longer used in the business organization.
5.2.2 Recording the Sale of Constitute Asset
The entry to record the sale of an asset for cash is like to the i illustrated to a higher place except that the receipt of cash should too be recorded. The following entries testify how to record the auction of equipment under three assumptions about the selling cost. In the first instance, the Br. 2000 cash received is exactly equal to the book value of the equipment (which is equal to Br. 2000).
Case 1. Sold at an amount equal to Volume value, Br. 2000, no gain or loss results.
Year v
July 5. Cash ……………………………………2000.00
Accumulated Depreciation, Equip……...9000.00
Equipment ………………………………..11000.00
Auction of equipment at an amount equal to book value
Case 2. Sold at Br. 1500 cash; Loss of Br. 500, (BV = Br. 2000)
Yr five
July 5. Loss on auction of equipment………………….500.00
Accumulated Depreciation…………… 9000.00
Greenbacks …………………………………….1500.00
Equipment…………………………………11000.00
Sale of equipment at less than the book value. Loss of Br. 500
Example 3. Sold at Br. 3000 greenbacks; gain of Br. k, cash received through
Auction less book value of the asset (Br. 3000 – Br. 2000)
Year 5
July 5.
Cash ……………………………………….3000.00
Accumulated Depr, Equipment……………9000.00
Equipment…………………………………..11000.00
Gain on sale of plant asset………………...thou.00
Sale of equipment at more than the book value; gain of Br. 1000,
(Br. 3000 – Br.2000) recorded
5.two.iii Recording Exchange of Constitute Assets
Businesses likewise dispose of plant assets by trading them in on the purchase of other plant assets. Exchanges may involve like assets, such every bit an old automobile traded-in on a newer model, or different avails, such as a machine traded-in on a truck. In either instance, the purchase cost is reduced by the amount of the trade-in assart.
The basic accounting for exchanges of plant avails is similar to accounting for sales of plant assets for cash. If the trade-in assart received is greater than the carrying value of the assets surrendered, in that location has been a gain. If the merchandise-in allowance is less than the carrying value, there has been a loss.
At that place are special rules for recognizing these gains and losses, depending on the nature of the assets exchanged.
Both Gains and Losses are recognized when a visitor exchanges unlike assets. Assets are unlike when they perform different functions; avails are similar when they perform the same office.
For financials reporting purposes, gains on exchanges of like assets are not recognized considering the earning lives of the asset surrendered are not considered to exist completed.
When a company trades-in an older auto on a newer auto of the same type, the economic substance of the transaction is the same every bit that of a major renovation and upgrading of the older machine.
Bookkeeping for commutation of similar assets is complicated by the fact that neither gains nor losses are recognized for income tax purposes.
Loss Recognized on the Substitution
A loss is recognized for financial reporting purposes on all exchange in which a material loss occurs.
Illustration-2
To illustrate the recognition of a loss, assume that the business exchange a machine with a price of Br. 11,000, and accumulated depreciation of Br. 9000 for a newer more than modern machine on the following terms:
Cost of new machine ………………………Birr 12000.
Trade-in Allowance for old machine……………(1500)
Greenbacks payment required (Kicking)……………..Birr 10500.
Solution
In the illustration above, the merchandise-in allowance (1500) is less than the carrying value (Br. 2000) of the old machine. The loss on the exchange is Br. 500, (Br. 2000 – Br. 1500). Therefore, the journal entry required to record the commutation of assets would be every bit follows:
Year 5.
July five. Equipment (New)……………………..120,00.00
Accum. Depreciation-Equip…………………...9,000.00
Loss on Exchange of plant assets………………. 500.00
Equipment (old)……………………………………11,000.00
Cash…………………………….…………………. ten,500.00
Loss Non Recognized on the Exchange
In the previous illustration, in which a loss was recognized, the new asset was recorded at the purchase cost of Br. 12000 and a loss of Br. 500 was recognized. If the transaction is for similar assets and is to be recorded for income revenue enhancement purpose, the loss should not be recognized. In this case, the cost basis of the new nugget will reverberate the effect of the unrecorded loss. The cost ground for the new asset, therefore, is computed past adding the cash payment to the conveying value of the old asset:
Carrying (Book) value of former Equipment……………………..Birr 2,000.00
Cash paid (Boot given)………………………………………… 10,500.00
Cost-ground of new Equipment ……………………………… Birr 12,500.00
Annotation that no loss is recognized in the entry to record this transaction.
Year 5.
July 5. Equipment (New)……………………………….12,500.00
Accumulated Depreciation……………………… 9,000.00
Equipment (one-time)……………………………11,000.00
Greenbacks……………………………………….. 10,500.00
To tape exchange of Equipments - price of old Equipments
and its related Accumulated Depreciation removed from the
accounts; new equipment recorded at amount equal to volume
value of one-time equipment plus kick given.
NB. The new equipment is recorded (reported) at a purchase cost of Br. 12000 plus the unrecognized loss of Br. 500. the post postponement of the loss. Since depreciation of the new equipment volition exist computed based on a cost of Br. 12500 instead of Br. 12000, the "unrecognized" loss results in more than depreciation each year on a new equipment than the loss had been recognized.
Gain Recognized on the Exchange
Gains on exchanges are recognized for financial reporting purposes when unlike assets are exchanged. To illustrate the recognition of a gain, assume the post-obit terms in which the machines being exchanged serve dissimilar functions:
Price of new machine………………………………Birr 12,000.00
Trade-in Allowance for quondam machine………………….(3000)
Cash payment required (Boot given)……………….Birr 9,000.00
Here the merchandise-in allowance (Br. 3000) exceeds the conveying value (Br. 2000) of the old machine by Br. 1000. thus, there is a proceeds on the substitution, if the trade-in assart represents the fair mark value of the old machine. Assuming that this condition is truthful, the entry to tape the transaction is as follows:
Years 5
July 5. Equipment (New)……………………………12,000
Accumulated Depreciation…………………….9,000
Equipment (quondam)………………………….eleven,000
Cash ……………………………………… 9,000
Gain on exchange of Equip………………..1,000
To tape the exchange of Equipments to remove
price of one-time equipment and the related accumulated
depreciation, new equipment recorded at price price;
proceeds recognized.
Proceeds Not Recognized on the Exchange:
A gain on an exchange should not be recognized in the accounting records if the assets perform like functions. The cost basis for the new equipment must bespeak the effect of the unrecorded gain. This cost ground is computed by calculation the cash payment to the carrying value of the one-time asset:
Carrying value of old equipment …………………………..Birr 2,000.00
Cash paid (Boot Given)………………………………………… nine,000.00
Price basis of new Equipment……………………………. Birr 11,000.00
The entry to record the transaction is equally follows:
Twelvemonth 5
July 5. Equipment (New)……………………………..xi,000.00
Accumulated Depreciation…………………… 9,000.00
Equipment (old)…………………………………..eleven,000.00
Cash…………………………………………………9,000.00
To tape commutation of Equipment to remove the cost of old
equipment and the related accum. depr. of old avails; new
equipment recorded at a cost equal to BV of old nugget plus cash paid.
As with the no recognition of losses, the no recognition of the gain on exchanges is, in effect, a postponement of the proceeds. Since depreciation will be computed on the cost basis of Br. xi,000, the "unrecognized" gain is reflected in less deprecation each year on new equipment than if the gain had been recognized.
5.3 Bookkeeping For Intangible avails and natural resources
Intangible Assets : are long-term assets that do not have concrete substance and in most cases relate to legal rights or advantages held.
Intangible assets include patents, copyrights, trademarks, franchises, arrangement costs, leaseholds, leasehold improvements, and goodwill. The resource allotment of intangible assets to the periods they benefits is chosen amortization.
Intangible assets are deemed for at acquisition cost, that is, the amount paid for them. Some intangible assets such as goodwill and trademarks may exist caused at little or no cost. Fifty-fifty though they may take corking value and be needed for profitable operations they should not appear on the balance sheet unless they take been purchased from another party at a price established in the market place place.
The, Accounting Principles Lath (APB) has decided that a company should record as assets the costs of Intangible assets acquired from others. Nevertheless, the company should record every bit expenses the cost of developing intangible assets. Also, intangible assets that have a determinable useful life such as patents, copyrights, and leaseholds, should be written off through periodic acquittal over that useful life in much the aforementioned way that plant assets are depreciated.
Even though some intangible assets, such as goodwill and trademarks, have no measurable limit on their lives, they should also be amortized over a reasonable length of time (not to exceed forty years).
Illustration - 3
Assume that on Jan 2,2002 MOHA Soft Drink Bottling company purchased a patent on a unique bottle cap for Br. 54,000.
The entry to tape the patent would exist as follows:
2002
Jan 2. Patent……………………………..54,000
Cash……………………………………..54,000
To tape the purchase of Bottle cap patent
Presume that MOHA's management determines that, although the patent for the bottle cap will concluding for seventeen years, the production using the cap will exist sold only for the next six years. The entry to record the annual amortization would be equally follows:
Amortization Expense………………………..9,000.00
Patent……………………………………………9,000.00
To record annual amortization of patent (Br. 54000/ 6 years)
Annotation that the patent account is reduced directly by the amount of the acquittal expense. This is in dissimilarity to other long-term asset accounts in which depreciation or depletion is accumulated in a split contra business relationship.
If the patent becomes worthless before it is fully amortized, the remaining carrying value is written off as a loss. For instance, assume that after the get-go two years MOHA soft Drink Bottling Company'southward chief competitor's offers a canteen with a new type of cap that makes MOHA's cap obsolete. The entry to record the loss is:
Loss on patent……………………………36,000.00
Patent……………………………………36,000.00
To record the loss resulting from patents becoming worthless.
Depletion of Natural Resource
We at present plow our attending to another grouping of long-lived assets natural resources, such as minerals, oil, and timber or lumber. These natural resources are extracted from the globe.
Depletion is the accounting measure used to allocate the acquisition price of natural resources. Depletion differs from depreciation because depletion focuses specifically on the physical use and exhaustion of the natural resources, while depreciation focuses more than broadly on any reduction of the economic value of a institute or fixed asset. The costs of natural resources are usually classified every bit long-terms assets.
Depletion expense is the measure of that portion of long-term assets that is used upwards in a particular period.
Illustration - 4
Suppose for instance, MIDROC Structure has acquired the correct to utilize 10,000 acres of land in Kibre-Mengist territory to mine for aureate at a full cost of, Br. 10,000.000. The Visitor estimated that the mine will; provide approximately 500,000 grams of gold. The depletion rate established is computed in the following style.
Total price – Salvage value = Depletion cost per unit of measurement.
Total estimated units bachelor
Br. 10,000,000 = Br. 20 per gram
500,000 units
If 100,000 grams are extracted in the first twelvemonth, so the depletion for the year is 2000.000 (grand,000 x Br. xx.00). The entry to record the depletion is therefore:
Depletion Expense…………………..2,000,000
Accumulated Depletion……………………….2,000,000
Source: https://hahuzone.com/disposal-of-plant-asset-accounting-principle-2
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