Sale of Plant Assets - Online Tutor, Practice Problems & Exam Prep

When a company disposes of a fixed asset, it assesses the cash received against the asset's net book value, calculated as cost minus accumulated depreciation. A gain occurs if proceeds exceed the net book value, while a loss arises if they fall short. No gain or loss is recorded if proceeds equal the net book value. These gains and losses impact the income statement under other income. Adjustments to accounts like equipment, accumulated depreciation, and cash reflect these transactions, influencing net income through credits for gains and debits for losses.

Sale of Fixed Assets

Alright, now let's see what happens when we get some cash when we dispose of a fixed asset. Alright, so a company may dispose of a fixed asset after it's fully depreciated or at any point during its useful life, okay? So we don't technically have to wait till we use up the whole asset, no. We can dispose we can buy it one day and sell it the next day, right? When we sell a plant asset, what's going to happen when we have cash involved? We're going to take a gain or a loss on the sale and it's going to be based on the current net book value, Okay? We've been talking about net book value a lot in this section, and net book value, remember, that's the cost minus the accumulated depreciation, okay?

So, cost minus accumulated depreciation, that is our net book value. So what do you think? If the proceeds from the sale, the cash that we get, if it's greater than the net book value, do you think we're going to get a gain or a loss? A gain, right? Because we're getting more money than the net book value, it's going to be worth some amount on our balance sheet and we're getting more than that amount in cash. So that's going to be a gain when the proceeds from the sale are more than the net book value. How about the opposite? What if we get less money? If the cash that comes in is less than the net book value, well, in that case, we're going to have a loss, okay? We're going to take a loss on the sale when the proceeds are less than the net book value. What about when the proceeds equal the net book value? Well, in that case, there's no gain or loss. No gain or loss when the proceeds equal the net book value. We're just trading out the value of an asset on our books for cash. We're just swapping that; there's no gain or loss. And remember that these gains and losses right here, they're going to go to the income statement, and they show up in the section of the statement below our operations. So we'll show revenues, we'll show operating expenses, or we'll show revenues and cost of goods sold, and then our operating expenses. And then we have the other section where we show other income which could be gains like these and losses like these, interest expense, things like that. They're all going to show up in that other section, okay?

So like we've been talking about this net book value, this is the initial cost minus the accumulated depreciation. Cool? So let's think about some T accounts that we've been dealing with and how they're going to be affected when we're selling an asset. So let's think about the equipment or any sort of plant asset, I'm going to say equipment here, but this goes for any plant asset that we're trying to sell, okay? The equipment account, well, what's going to increase the equipment? We're going to start with the beginning balance, right? We're going to have some beginning balance in the account, and what can increase that account? Well, purchasing equipment will increase that account, right? What's going to decrease the equipment account? When we sell the equipment, right? When we sell the equipment, we have to get it off our books, and then we'll be left with our ending balance, okay. So that's how we adjust the equipment account. How about the accumulated depreciation account? So the accumulated depreciation account, it'll have some beginning balance, and then what increases the accumulated depreciation? Well, that's when we take depreciation expense, right? Whenever we do a depreciation expense entry, what's the credit side of that entry? Our debit is depreciation expense. The credit is accumulated depreciation. So that's going to be increasing these accounts with credits, right? Remember, accumulated depreciation, it's a contra asset, so it goes up with credits. And what's going to decrease our accumulated depreciation account? Well, that's when we sell an asset. When we sell the related asset, whatever we were accumulating depreciation on, if we get rid of that asset, we got to get rid of its accumulated depreciation as well, okay? And that'll leave us with some ending balance there. What about cash? How can cash be involved here? So cash is going to be in these journal entries as well, and cash is affected by all sorts of things, it's really hard to use our base formula and a T account for cash because cash is kind of everywhere in all sorts of transactions. But in this specific case, it's going to increase cash from the proceeds of the sale. Right? Whenever we sell it, regardless of whether we got a gain or a loss, if we receive some cash, it's going to increase our cash balance, Right? And finally, we're going to have gains or losses. So these gains or losses, well, those are going to depend on like we talked about above. The difference between the net book value, so the value in these accounts here, tell us our net book value of that equipment or whatever we're dealing with, and then this cash, this is the proceeds from the sale, the difference is going to be our gain or loss. So if we have a gain, is that going to be a credit or a debit? Gains are credits, right? They increase our net income whenever we have a gain. So those would show up over here, and losses would show up over here as debits. They decrease our net income, Okay? So that's how we deal with these accounts that are going to show up when we're dealing with a sale of an asset. Alright? So let's pause real quick, and then we're going to do some examples of how we deal with this. Alright? Let's check.

Sale of Fixed Assets

Alright, let's try this example at the top of the screen. On December 31, 2009, ABC Company sold machinery with an initial cost of $20,000 for $8,000. The machine had accumulated depreciation of $15,000 after all adjusting entries were made. So, we sold this machine and it told us, right? We sold it for $8,000, so that was the cash that we received, right? We received $8,000 in cash. Kind of a crazy arrow I drew there, but that's an arrow pointing to the cash there. And this initial cost of $20,000, well, that was sitting in our equipment account, right? Or machinery, let's say machinery because that's what it says in the problem. So, that's in the machinery account. And then what about over here? We had accumulated depreciation of $15,000, so that was in our accumulated depreciation account.

Alright, so these are numbers that we're going to use in our entry. The first thing we know is that we have to debit cash, right? We received cash of $8,000 so we're going to debit cash for $8,000 and now we have machinery and accumulated depreciation, right? We no longer have this machine; we got rid of it. So, we have to get rid of the machinery and its associated accumulated depreciation. The machinery, did it have a debit balance or a credit balance on our books? It had a debit balance, right? Machinery is an asset, so it would have had a debit balance, so we get rid of it with a credit. So let's put our credits down here. Machinery and that had a balance of $20,000, so we're going to credit it for $20,000 and now it will no longer be on our books. What about the accumulated depreciation? We got to get that off of our books as well. Did that have a debit or a credit balance? A credit balance, right? It's a contra asset and contra assets have credit balances, so to get rid of it, well, we're going to need a debit, so we're going to debit here accumulated depreciation, and that'll be for the $15,000 that was on our books.

Alright, so we've gotten the asset off of our books; it's no longer on our books, but look at this—our debits equal $23,000, right? $15,000 plus $8,000—that's $23,000—where our credits only equal $20,000. So we need another credit here. And this is going to be the gain or the loss on the sale, right? So what do you think? Is this going to be a gain or a loss? Well, if we need a credit, that means we have a gain, right? Because gains go up with credits. So, gain on the sale, and that's going to be for the amount that's going to balance this out. So it's going to be $3,000 here, right? Our debits equal $23,000, so we need a $3,000 credit to balance this out. And we call this a plug because we just plugged that in. It wasn't given to us as any value. We plugged it in to make the equation balance, but this should make sense, right? We received cash of $8,000. What was the net book value of the machine? The net book value was the $20,000 cost minus $15,000 in accumulated depreciation. It had a $5,000 net book value. So, we received cash of $8,000: cash minus the net book value of $5,000. Well, there's the gain of $3,000 right there, right? That was the more cash we've received than the net book value. So, there we go. This is our entry over here. We're going to debit cash, debit accumulated depreciation, and then credit our gain and credit the machine. So there's our entry right there.

So what happened to our assets? Well, our cash went up by $8,000, right? Our accumulated depreciation went down by $15,000, right? Because when we're thinking about assets as a total, this decreased our asset balance when we got rid of some accumulated depreciation, but then we got rid of the machine, right? And the machine went down by $20,000. But in essence, our assets went up by $3,000 there, right? Our assets the $8,000 plus the $15,000 and then minus the $20,000, well that's a net increase of assets of $3,000, and that balances out with our gain in equity that goes to our income statement. We had a $3,000 gain right there, right? So it all balances out. Cool? Alright, let's see what a tougher problem might look like.

Sale of Fixed Assets

So sometimes professors want you to calculate depreciation before the actual sale of the asset. They love to combine these two things together. So let's check out this tougher problem. On July 1, 2009, ABC Company sold machinery with an initial cost of $52,000, originally purchased on January 1, 2008. So we originally purchased it on January 1, 2008, but we're selling it on July 1, 2009. Notice that we're dealing with a partial year of depreciation in the second year. The machine had an estimated useful life of 10 years and a salvage value of $2,000. The company uses the straight-line method, and the machinery was sold for $36,000. We know this $36,000, what's that going to be? That's the cash we receive, right? The cash we receive on the sale, so that will end up being in our journal entry. But the first thing we need to do is find out what was our net book value. They didn't tell us the total amount of accumulated depreciation; we have to figure that out for ourselves.

We bought it on January 1, 2008, and we're selling it on July 1, 2009. So let's go ahead and find out; since it's a straight line, we need to find our depreciation per year. Our depreciation expense per year will equal our cost of $52,000 minus our salvage value of $2,000 and we’re going to divide that by our estimated useful life of 10. ($52,000 - $2,000) 10 equals $5,000 of depreciation per year, right? So every year we’re going to take $5,000 in depreciation. And how long has it been that we’ve owned the asset and been taking depreciation? Well, we took a full year of depreciation last year, right? So we would have had accumulated depreciation. Let's keep a T-account for accumulated depreciation over here. In 2008, we would have taken depreciation of $5,000, right? For the full year of 2008. What about in 2009? Well, in 2009, we didn't have it the whole year, right? We sold it halfway through the year on July 1st when this transaction is happening. So we need to take half of a year of depreciation, right? January, February, March, April, May, June, we owned it for 6 months before we sold it, so we got to take half a year of depreciation expense. So if $5,000 was a full year of depreciation, we would have taken half a year of depreciation, $2,500, for those 6 months that we owned it in 2009.

So that's how this can get pretty tricky, right? If they want to combine all of these topics, how you calculate depreciation, partial depreciation, as well as the sale of the asset, all in one. Okay? So now we know the total accumulated depreciation since we owned the asset is $7,500, okay? So now we can make our journal entry. Let's do our journal entry. We know we received cash of $36,000, right? So that's definitely going to be in our journal entry. Cash $36,000. What else? The accumulated depreciation, we got to get that off of our books. We sold the machine, so we no longer have that accumulated depreciation either. So accumulated depreciation, we got to debit it, right? It has a credit balance from our depreciation entries, well now we got to debit it to get rid of it and that's going to be $7500 right there. And what else? We have the actual machine's cost, right? There's going to be the asset value from when we originally purchased it of $52,000. We got to get that off of our books and that's going to be with a credit, right? Because that was an asset, and we get rid of the debit with this credit to machinery for $52,000.

The last thing we got to do is balance this entry, right? Now with the credit to machinery, the debit to accumulated depreciation, we’ve gotten the asset off of our books. The debit to cash, we receive that cash, the last thing is going to be the gain or the loss. So our total credits are $52,000 and our total debits at this point are $43,500, right? So we got to find the difference between the two. So here we go, the difference between the $52,000 and the $43,500 that we have in debits right now, that's going to be $8,500. Now is that going to be a loss or a gain? It's going to be a loss, right? Because it's going to be on the debit side. Our debits are less than our credits now, we need more debits, and we can only get these debits from this loss on the sale. So we have a loss on sale, and that's going to be for $8,500, right? And that's going to balance out our entry. And again, this was a plug, right? We plug that in to make our entry balance. So we always want to check if our debits and credits, which one's bigger? And if we need more debits, it's a loss. If we need more credits, it's a gain. But this should also make sense because if we look at the net book value of the asset on this day, well, it was $52,000 minus our accumulated depreciation of $7,500 and what does that give us? $52,000 minus $7,500, that gives us $44,500 was our net book value, and what did we sell it for? $36,000. So the $36,000 cash we received minus the $44,500 in net book value that we gave up for it, well, that equals our loss, right? We lost $8,500 and that's the loss that went into our entry right there. Cool? So all the math checks out from whatever angle we approach it from. Cool? Alright.

Let's go ahead and fill this in. We've got cash, we received $36,000 in cash, and we got rid of accumulated depreciation of $7,500 that increased our assets. But then we got rid of machinery, right? And the machinery was $52,000. So that was a net decrease in our assets. If we take the $52,000 decrease and then we add the $36,000, add the $7,500, well, that gives us a net decrease of $8,500 and that net decrease of $8,500 is matched by this loss in equity that's going to show up on our income statement of $8,500 as well. So that's going to bring down our equity and our equation stays balanced. Alright? Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the net book value of a plant asset and how is it calculated?

The net book value of a plant asset is the value of the asset as recorded on the balance sheet after accounting for depreciation. It is calculated by subtracting the accumulated depreciation from the asset's initial cost. The formula is:

$\mathrm{Net} \mathrm{Book} \mathrm{Value}=\mathrm{Cost}-\mathrm{Accumulated} \mathrm{Depreciation}$

This value helps determine whether a gain or loss is realized upon the sale of the asset.

How do you record a gain or loss on the sale of a plant asset?

To record a gain or loss on the sale of a plant asset, compare the cash proceeds from the sale to the asset's net book value. If the proceeds exceed the net book value, record a gain; if they are less, record a loss. The journal entry involves debiting cash and accumulated depreciation, crediting the asset account, and recording the gain or loss. Gains are credited, increasing net income, while losses are debited, decreasing net income.

What happens to accumulated depreciation when a plant asset is sold?

When a plant asset is sold, the accumulated depreciation associated with that asset is removed from the books. This is done by debiting the accumulated depreciation account, which reduces its balance. This adjustment ensures that the net book value of the asset is accurately reflected in the gain or loss calculation upon sale.

Where do gains and losses from the sale of plant assets appear on the financial statements?

Gains and losses from the sale of plant assets appear on the income statement under the section titled 'Other Income.' This section is below the operating income and includes items like interest expense, gains, and losses. These gains and losses impact the net income, with gains increasing it and losses decreasing it.

How does the sale of a plant asset affect the cash account?

The sale of a plant asset affects the cash account by increasing it by the amount of cash received from the sale. This is recorded as a debit to the cash account in the journal entry. The increase in cash reflects the inflow of funds from disposing of the asset.