1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Long-Term Assets: Plant Assets and Intangibles Chapter 9 Part 2

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 4 Calculate and record the disposal of plant assets

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Disposing of a Plant Asset Sell Exchange Discard

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Disposing of a Plant Asset Bring depreciation up to date Compare assets received with book value of asset being disposed of to determine if there is a gain or loss –Gain increases net income – credit balance –Loss decreases net income – debit balance Record entry to remove asset from books

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Disposing of a Plant Asset Gain/Loss depends on accuracy of estimate of residual value –Gain increases net income – credit balance Often a recovery of depreciation expense –Loss decreases net income – debit balance May be due to fact that estimated depreciation was not enough.

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 E9-21E9-21 Depreciation for 2007: $10,000 / 5 = $2,000 Depreciation for 2008 (through Sept 30) ($10,000 / 5) x 9/12 = $1,500 Accumulated Depreciation 2,000 1,500 3,500 balance

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 E9-21E9-21 Book Value of Fixtures: Cost$10,000 Accumulated Depreciation3,500$6,500 Cash Received(5,000) Loss on sale of fixtures$1,500

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Sep30Depreciation Expense1,500 Accumulated Depreciation1,500 30Cash5,000 Accumulated Depreciation3,500 Loss on Sale of Fixtures1,500 Fixtures10,000 E9-21E9-21

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Exchanging Plant Assets “Cost” of the new asset = Sum (Folds basis of old asset into basis of new asset and defers recognition of gain) Must be same type of asset (trade-in) Market value of new asset Book value of old asset + cash given >

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Exchanging Plant Assets “Cost” of the new asset =Purchase Price Market value of new asset Book value of old asset + cash given < Recognize a loss for the difference

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 E9-23E9-23 Depreciation Rate: ($350,000 - $100,000) / 1,000,000 miles = $0.25 per mile Depreciation Expense: 2006: $0.25 x 80,000 miles = $20,000 2007: $0.25 x 120,000 miles =30,000 2008: $0.25 x 160,000 miles = 40,000 2009: $0.25 x 40,000 miles =10,000 Total accumulated depreciation$100,000

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 E9-23E9-23 Book value of old truck: Cost$350,000 Accumulated depreciation(100,000) $250,000 Cash paid50,000 Cost of new truck$300,000 If new truck was purchased for more than $300,000, then basis of new truck is $300,000. Defers gain

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 E9-23E9-23 Book value of old truck: Cost$350,000 Accumulated depreciation(100,000) $250,000 Cash paid50,000 Cost of new truck$300,000 If new truck was purchased for less than $300,000, then basis of new truck is fair market value (price paid). Recognize the loss