Sale of Property, Plant, and Equipment

Definition

The term sale of property, plant, and equipment refers to the selling or exchange of the company's assets.  When the sale of property, plant, or equipment occurs, the company must compare the asset's original purchase price and accumulated depreciation to its selling price to determine if there was a gain or loss on the transaction.

Explanation

One of the ways a company can dispose of assets is through their voluntary sale or exchange.  Involuntary conversions can also occur, which are the result of an unwanted event such as a fire, flood, or even theft.

When a company disposes of an asset, it must calculate the depreciation occurring between the last journal entry date and the date of retirement.  The net book value is then determined by subtracting the total accumulated depreciation from the asset's historical cost.  Net book value is then compared to the selling price of the asset to determine if there was a gain or loss on the transaction.  The gain or loss would be shown on the income statement, and categorized as continuing operations; unless the sale involved the disposition of a business segment.  In that situation, the gain or loss would be associated with discontinued operations.

Example

Company A has agreed to sell machinery to Company XYZ for $50,000.  Company A paid $200,000 for this three year old machine.  When purchased, the equipment was thought to have a serviceable life of five years.  The annual depreciation on the asset was calculated to be:

= $200,000 / 5, or $40,000 per year

After three years, the accumulated depreciation would be:

= $40,000 x 3, or $120,000

The gain or loss on the sale of the machinery would be calculated as:

Cost of Machinery $200,000
Less: Accumulated Depreciation $120,000
Net Book Value $80,000
   
Proceeds from Sale $50,000
Loss  from Sale of Machinery -$30,000

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

  Debit Credit
Cash $50,000  
Accumulated Depreciation   $80,000
Loss on Disposal $30,000  

Related Terms

property, plant, and equipment, costs subsequent to acquisition, additions, improvements and replacements, reinstallations and rearrangements, repairsinvoluntary conversions, property rights