Disposition of Property, Plant, and Equipment

Definition

The financial accounting term disposition of property, plant, and equipment refers to the disposal of the company's assets.  This can include the sale, exchange, abandonment, and involuntary termination of the asset's service.  Disposition of plant typically results in a gain or loss appearing on the company's income statement.

Explanation

Companies can dispose of assets voluntarily through their sale or exchange.  Involuntary conversions can also occur, which is the termination of the asset's serviceable life due to an unwanted event such as a fire, flood, or even theft.  Regardless of the disposal process, depreciation continues up to the point in time this occurs, and the accounts associated with the asset must be removed from the company's books.

Since depreciation is a function of serviceable life, and not the asset's market value, it would be rare for the book value of the asset to be equal to its disposal value.  Typically, companies realize a gain or loss on the disposition of plant and equipment.  In theory, that loss or gain should have been reflected on the income statement during the asset's serviceable life.  In practice, the gain or loss appears in the current accounting period.

If the disposition involves a business segment, the gain or loss should be reported along with other gains or losses associated with discontinued operations.  All other transactions would be categorized as continuing operations.

Example

Company A entered into an agreement to sell Company XYZ its two year old widget maker for $80,000.  The original cost of the widget maker was $120,000, and the asset was being depreciated over four years.  Accumulated depreciation was $60,000 on this equipment.  The gain or loss on the sale would be calculated as:

Cost of Widget Maker $120,000
Less: Accumulated Depreciation $60,000
Net Book Value $60,000
   
Proceeds from Sale $80,000
Gain from Sale of Widget Maker $20,000

The following journal entries are needed to remove the asset from the company's books:

  Debit Credit
Cash $80,000  
Accumulated Depreciation   $60,000
Gain on Disposal   $20,000

Related Terms

property, plant, and equipment, costs subsequent to acquisition, additions, improvements and replacements, reinstallations and rearrangements, repairs, sale of property, plant, and equipment, involuntary conversionsproperty, plant and equipment disclosures