Eventually, plant assets need to be replaced.
The most common reasons are that they
wear out or become obsolete or just become too costly
to continue to repair.
Generally, there are three ways to dispose of plant assets.
The first is just scrap or retire an asset.
The second is to sell an asset.
The third is to trade or exchange
an old asset for a new one.
This video will focus on the accounting
for exchange of asset.
But please note that this is a very simplified
overview of this topic at an accounting principles level.
In reality, accounting for exchanges in plant assets
is far more complicated than what
I'm going to demonstrate here.
When we exchange plant assets, there
are a few steps we need to do in order to make
the proper journal entry.
The first step is to record depreciation expense as
of the scrap date.
It is unlikely that accumulated depreciation account has
the correct balance already.
Next, we need to remove the asset from our balance sheet.
We do this by zeroing out the plant asset and accumulated
depreciation account.
Additionally, we need to record the new asset, as well
as any cash paid in the transaction.
Finally, we need to record any gain or loss related
to the exchange of assets.
Let me go over a few of the rules that
guide us in recording journal entries
for the exchange of assets.
To begin with, they are commonly called non-monetary exchanges.
The basis for the amounts recorded in the transaction
is fair market values.
Assets are recorded at their costs.
And the cost of a new plant asset received
is equal to the fair value of the old asset given up
plus any cash paid.
Finally, gains or losses occur when
the fair value of what we give up
is different than the book value of the assets given up.
Let's look at an example.
Charlatans UK trades an old delivery truck and $40,000
cash on June 30, 2018 for a new truck that
has a sticker price of $50,000.
The old truck's original cost was $40,000,
and it is worth $8,000 on June 30.
As of June 30, the total amount of accumulated depreciation
was $30,000.
So what is the fair value of the assets given up?
Well, we paid cash of $40,000 plus
traded an old truck worth $8,000 for a total of $48,000.
This becomes the cost of the new truck.
So now let's record the journal entry to exchange these assets
on June 30.
I think the simplest way to record disposal of assets
journal entries is to start with the accounts
and amounts you know.
In this case, we need to debit truck--
that's the new truck--
for $48,000.
We calculated this amount just two slides earlier.
Also, we need to debit accumulated depreciation.
And the balance is $30,000.
This will remove accumulated depreciation from our books.
We also need to credit the truck--
and that's the old truck--
and its balance is $40,000.
This will remove the old truck from our books.
We also need to credit cash for $40,000,
as this is the amount we paid for the new truck.
So you can see this journal entry doesn't balance.
We need a debit for $2,000 to make it balance.
So I am missing a debit amount for $2,000.
In this case, we incurred a loss of $2,000
when exchanging assets.
Losses are like expenses.
They have normal debit balances, and they decrease net income.