These manufacturing units are using asset management solutions for the improvement in the overall manufacturing processes, which is expected to drive the growth of the PAM market in the region. Gain or loss on the exchange of plant assets can be determined by comparing the net book value of the plant assets (cost – accumulated depreciation) with its fair value at the time of exchange. The culmination of the asset disposal process is the recording of the journal entry.

This involves eliminating the asset’s cost and accumulated depreciation from the ledger. Understanding the asset’s historical cost and applied depreciation method is essential. For example, accumulated depreciation under the straight-line method reflects the asset’s age and usage. The proceeds from the sale exceed the net book value by $5,000, which would be recorded as a gain. Conversely, if the same asset were sold for $15,000, the transaction would result in a $5,000 loss, as the proceeds are less than the net book value.

The equipment will be disposed of (discarded, sold, or traded in) on 4/1 in the fourth year, which is three months after the last annual adjusting entry was journalized. The first step is to journalize an additional adjusting entry on 4/1 to capture the additional three months’ depreciation. Since the annual depreciation amount is $1,200, the asset depreciates at a rate of $100 a month, for a total of $300. On the income statement, the operating profit is likely to increase because the depreciation expense will no longer be recorded on the income statement.

3.4 Impact of held for sale loss on subsidiary financial statements

The trade-in allowance of $7,000 plus the cash payment of $20,000 covers $27,000 of the cost. The asset’s book value on 10/1 of the fourth year is $1,500 ($6,000 – $4,500). The asset’s book value on 4/1 of the fourth year is $2,100 ($6,000 – $3,900). Accumulated depreciation on the equipment at the end of the third year is $3,600, and the book value at the end of the third year is $2,400 ($6,000 – $3,600). Next, compare its book value to the value of what you get for in return for the asset to determine if you breakeven, have a gain, or have a loss. A gain results when an asset is disposed of in exchange for dispositions of plant assets something of greater value.

Exchanging/Trading in a Fixed Asset

When disposing of an asset, a company must choose a method that aligns with its financial goals and regulatory requirements. The method chosen impacts how the transaction is recorded and its financial implications. If you’d like to learn more about asset disposals, and other fundamental accounting concepts, consider looking at our accounting course The Accountant. Elevate your career prospects by taking our online finance course and earning a Wall Street-recognized certification.

Types of Disposal Scenarios

• Understanding the asset’s historical cost and applied depreciation method is essential.
• Its cost can be covered by several forms of payment combined, such as a trade-in allowance + cash + a note payable.
• This could happen for various reasons, such as obsolescence, sale of a business segment, or replacement with newer assets.
• On the income statement, the operating profit is likely to increase because the depreciation expense will no longer be recorded on the income statement.

The asset has an original cost of $10,000 and accumulated depreciation of $8,000. The overall concept for the accounting for asset disposals is to reverse both the recorded cost of the fixed asset and the corresponding amount of accumulated depreciation. Any remaining difference between the two is recognized as either a gain or a loss. If a company purchases a machine for $50,000 and the machine is given a 5-year useful life, then the depreciation recorded in the expense account every year will be $10,000.

• The truck originally cost $25,000, and its accumulated depreciation at the time of sale is $15,000.
• For trade-ins, retaining records of trade-in value and terms is essential.
• The intricacies involved in documenting asset disposal can be complex, requiring a clear understanding of accounting principles and regulatory requirements.
• In theory, that loss or gain should have been reflected on the income statement during the asset’s serviceable life.

Recording Cash Received

Partial-year depreciation to update the truck’s book value at the time of sale could also result in a gain or break even situation. As a result of this journal entry, both account balances related to the discarded truck are now zero. The net result is an increase in cash of $25,000, reflecting the cash received from the sale of the machine. Assume the company had net income of $100,000 for the period and recognized a $5,000 gain from the sale of the machine.

The next step is to determine the method of disposal, which could be through sale, trade-in, or scrapping. Each method has different accounting treatments and may affect the financial statements in various ways. Businesses must record the loss or gain earned if they sell their asset. That said, they must record it, too, if they donated or threw away the asset. The asset’s original cost and the gains earned from the sale are recorded as asset credit.

If new equity is issued, the stock price might decline due to the dilution of the shares. Gains from asset sales may be subject to capital gains tax, while losses can offset other taxable income within certain limits. For instance, in 2024, U.S. long-term capital gains are taxed at rates from 0% to 20%, depending on income. Capital losses can offset gains dollar for dollar, with excess losses offsetting up to $3,000 of ordinary income per year. Accurate records and strategic planning are essential for optimizing tax outcomes. When a company disposes of an asset, it must also provide disclosures in its financial statements that give stakeholders a clear understanding of the transaction.

Accounting Treatment of PPE Disposal

Accounts receivable are usually incurred when buyers pay a company for its products or services with credit. US Treasury bills, for example, are a cash equivalent, as are money market funds. Property, plant, and equipment (PP&E) are the long-term, tangible assets that a company owns. PP&E, which includes trucks, machinery, factories, and land, allows a company to conduct and grow its business. If a company produces machinery , that machinery is not classified as property, plant, and equipment, but rather is classified as inventory. The same goes for real estate companies that hold buildings and land under their assets.