Page 449 - Accounting Principles (A Business Perspective)

11. Plant asset disposals, natural resources, and intangible assets

This function is closely related to the work of the plant asset accountant. Many of the same questions must be
addressed when accounting for intangible assets. The question still remains, how can you measure something you
cannot see?

Your study of long-term assets—plant assets, natural resources, and intangible assets—began in Chapter 10,
which focused on determining plant asset cost, computing depreciation, and distinguishing between capital and
revenue expenditures. This chapter begins by discussing the disposal of plant assets. The next topic is accounting
for natural resources such as ores, minerals, oil and gas, and timber. The final topic is accounting for intangible
assets such as patents, copyrights, franchises, trademarks and trade names, leases, and goodwill.
Note that accounting for all the long-term assets discussed in these chapters is basically the same. A company
that purchases a long-term asset records it at cost. As the company receives benefits from the asset and its future

service potential decreases, the accountant transfers the cost from an asset account to an expense account. Finally,
the asset is sold, retired, or traded in on a new asset. Because the lives of long-term assets can extend for many
years, the methods accountants use in reporting such assets can have a dramatic effect on the financial statements
of many accounting periods.
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.

Sale of plant assets
Companies frequently dispose of plant assets by selling them. By comparing an asset's book value (cost less

accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company
may show either a gain or loss. If the sales price is greater than the asset's book value, the company shows a gain. If
the sales price is less than the asset's book value, the company shows a loss. Of course, when the sales price equals
the asset's book value, no gain or loss occurs.
To illustrate accounting for the sale of a plant asset, assume that a company sells equipment costing USD 45,000
with accumulated depreciation of USD 14,000 for USD 35,000. The firm realizes a gain of USD 4,000:
Equipment cost $ 45,000
Accumulated depreciation 14,000
Book value $ 31,000

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