Sale of Plant Assets

Alright now let's see what happens when we get some cash when we dispose of a fixed asset? Alright, so a company may dispose of a fixed asset after it's fully depreciated or at any point during its useful life. Okay. So we don't technically have to wait till we use up the whole asset. No, we can dispose we can buy it one day and sell it the next day. Right? So when we sell a plant asset, what's gonna happen when we have cash involved? What we're gonna take a gain or a loss on the sale and it's going to be based on the current net book value? Okay, so we've been talking about netbook value a lot in this in this section and netbook value. Remember that? That's the cost minus the accumulated depreciation. Okay, so cost minus accumulated depreciation, That is our net book value. So what do you think if the proceeds from the sale, the cash that we get if it's greater than the netbook value? Do you think we're gonna get a gain or a loss again? Right, because we're getting more money than the netbook value, it's gonna be worth some amount on our balance sheet and we're getting more that than that amount in cash. So that's gonna be a gain when the proceeds from the sale are more than the netbook value. How about the opposite what if we get less money if the cash that comes in is less than the netbook value? Well in that case we're gonna have a loss? Okay we're gonna take a loss on the sale when the proceeds are less than the netbook value. What about when the proceeds equal the netbook value? Well, in that case there's no gain or loss, no gain or loss when the proceeds equal the net book value. We're just trading out the value of an asset on our books for cash. We're just swapping that, there's no gain or loss. And remember that these gains and losses right here, they're gonna go to the income statement and they show up in the section of the income statement below our operation. So we'll show revenues, will show operating expenses or revenues and cost of goods sold and then our operating expenses. And then we have the other section where we show other income which could be gains like these and losses like these interest, expense, things like that. They're all gonna show up in that other section. Okay, So like we've been talking about this netbook value, this is the initial cost minus the accumulated depreciation. Cool. So let's think about some t accounts that we've been dealing with and how they're going to be affected when we when we're selling an asset. So let's think about the equipment or any sort of plant asset, I'm gonna say equipment here, but this goes for any plant asset that we're trying to sell. Okay, so the equipment account? Well, what's gonna increase the equipment? Well, we're gonna start with the beginning balance, right, we're gonna have some beginning balance in the account. and what can increase that account. Well, when we buy more equip equipment, right, purchasing equipment will increase that account? What's going to decrease the equipment account when we sell the equipment, right? When we sell the equipment, we gotta get it off of our books and then we'll be left with our ending balance. Okay? So that's how we adjust the equipment account about the accumulated depreciation account. So the accumulated depreciation account, it'll have some beginning balance. And then what increases the accumulated depreciation? Well, that's when we take depreciation expense, right? Whenever we do a depreciation expense entry, what's the credit side of that entry? Our debit depreciation expense? The credit is accumulated depreciation. So that's going to be increasing in these accounts with credits, Right? Remember accumulated depreciation is a contra asset. So it goes up with credits. And what's gonna decrease our accumulated depreciation account? Well, that's when we sell an asset, when we sell the related asset, whatever we were accumulating depreciation on, If we get rid of that asset, we gotta get rid of its accumulated depreciation as well. Okay, And that'll leave us with some ending balance there. What about cash? How can cash be involved here? So cash is going to be in these journal entries as well and cash is affected by all sorts of things. It's really hard to use our base formula and a T account for cash because cash is kind of everywhere in all sorts of transactions. But in this specific case it's gonna increase cash from the proceeds of the sale, right? Whenever we sell it, regardless of whether we gotta gain or a loss. If we receive some cash, it's gonna increase our cash balance, right? And finally we're gonna have gains or losses. So these gains or losses. Well, those are gonna depend on, like we talked about above the difference between the netbook value. So the value in these accounts here tell us our netbook value of that equipment or whatever we're dealing with. And then this cash, this is the proceeds from the sale. The difference is going to be our gain or loss. So if we have a gain, is that gonna be a credit or a debit gains are credits, right? They increase our net income whenever we have a gain. So those would show up over here and losses would show up over here as debits, they decrease our net income. Okay, So that's how we deal with these these accounts that are going to show up when we're dealing with a sale and asset. Alright, So let's pause real quick and then we're going to do some examples of how we deal with this. All right, let's check

Alright, let's try this example at the top of the screen on December 31, 2009. ACC Company sold machinery with an initial cost of $20,000 for $8,000. The machine had accumulated depreciation of 15,000 after all, adjusting entries were made. All right. So, we sold this machine and it told us right? It told us we sold it for $8,000. So that was the cash that we received, right? We received 8000 in cash. Kind of a crazy arrow. I drew there. But that's an arrow pointing to the cash there. And this initial cost of 20,000. Well, that was sitting in our equipment account, right? Or machinery, let's say machinery, because that's what it says in the problem. So that's in the machinery account. And then what about Over here we had accumulated depreciation of 15,000. So that was in our accumulated depreciation account. Alright, So these are numbers that we're gonna use in our entry. The first thing we know is that we have to debit cash, right? We received cash of $8000. So we're going to debit cash for 8000 and now we have machinery and accumulated depreciation, right? We no longer have these this machine, we got rid of it. So we have to get rid of the machine and we have to get rid of its associated accumulated depreciation. So the machinery didn't have a debit balance or a credit balance on our books. It had a debit balance, right? Machineries and asset. So it would have had a debit balance. So we get rid of it with a credit. So let's put our credits down here machinery. And that had a balance of 20,000. So we're going to credit it for 20,000. And now it will no longer be on our books. What about the accumulated depreciation? We got to get that off of our books as well. Did that have a debit balance or a credit balance? A credit balance? Right? It's a contra asset and contra assets have credit balances. So to get rid of it. Well, we're gonna need a debit. So we're going to debit here, accumulated accumulated depreciation And that'll be for the 15,000. That was on our books. Alright, so we've gotten the asset off of our books. It's no longer on our books. But look at this, our debits equal 23,000, right? 15,000 plus 8000. That's 23,000. Where credit's only equal 20,000. So we need another credit here. And this is gonna be the gain or the loss on the sale. Right. So what do you think is this gonna be a gain or a loss? Well, if we need a credit, that means we have a game, right? Because the gains go up with credits, so gain on sale and that's going to be for the amount that's gonna balance this. So it's gonna be 3000 here, right? Our debits equal 23,000. So we need a 3000 credit to balance this out and we call this a plug because we kind of just plug that in. It wasn't given to us as any value. We plugged it in to make the equation balance, but this should make sense. Right? We received cash of 8000. What was the net book value of the machine? The netbook value was the 20,000 cost -15000 in accumulated depreciation. It had a 5000 net book value. So we received cash of 8000 cash minus the netbook value of 5000. Well, there's the gain of 3000 right there, right? That was the more cash we've received than the netbook value. So there we go. This is our entry over here. We're gonna debit cash, debit accumulated depreciation and then credit our gain and credit the machine. Okay, So there's our entry right there. So what happened to our assets? Well, our cash went up by 8000, right, Our accumulated depreciation went up by 15,000, right? Because when we're thinking about assets as a total, this increased our asset balance when we got rid of some accumulated depreciation, but then we got rid of the machine, Right? And the machine went down by 20,000. But in in essence, our assets went up by 3000 there, right? Our assets, the 8000 plus the 15,000 and then minus the 20,000. Well, that's a net increase of assets of 3000. And that balances out with our gain in equity. That goes to our income statement. We had a 3000 gain right there. Okay, so it all balances out. Cool. Alright, let's see what a tougher problem might look like.

So sometimes professors want you to calculate depreciation before the actual sale of the asset. They love to combine these two things together. So let's check out this tougher problem on july 1st 2009. Abc company sold machinery with an initial cost of 52,000. Originally purchased january 1st 2008. So we originally purchased january 1st 2008, but we're selling it notice july that's another big thing, July 1, 2009. So we're dealing with a partial year of depreciation in the second year. So we originally purchased it in January 1, 2008. The machine had an estimated useful life of 10 years and salvage value of 2000. Company uses straight line method and the machinery was sold for 36,000. So we know this. 36,000. What's that gonna be? That's the cash we receive, Right? The cash we received on the sale. So that will end up being in our journal entry. But the first thing we need to do is find out what was our netbook value. They didn't tell us the total amount of accumulated depreciation. We have to figure that out for ourselves. So we bought it january 1st 2008 and we're selling it july 1st 2009. So let's go ahead and find out since it's straight line, we need to find our depreciation per year. So our depreciation expense per year. Well, that's going to equal our cost of 52,000 minus our salvage value of 2000. And we're gonna divide that by our estimated useful life of 10, 52,000 minus 2000 is 50,000 divided by 10, that's 5000 of depreciation per year. Right? So every year we're gonna take 5000 and depreciation. And how long has it been that we've owned the asset and been taking depreciation? Well, we took a full year of depreciation in last year. Right? So we would have had accumulated depreciation. Why don't we keep a t account for accumulated depreciation over here? So in 2008, in 2008, let me write that over here. So in 2008, can you see that? It's a little a little bit on the edge. I'll write it on this side. 2008. Well, we would have taken depreciation of 5000, right? For the full year of 2008. What about in 2009? Well, in 2009, we didn't have it the whole year. Right? We sold it halfway through the year. In july july 1st when this transaction is happening. So we need to take half of a year of depreciation, Right, january, february March, april may june we owned it for six months before we sold it. So we gotta take half a year of depreciation expense. So if 5000 was a full year of depreciation. Well, we would have taken half a year of depreciation. 2500 for those six months that we owned it in 2009. So, that's how this can get. Pretty tricky, right? If they want to combine all of these topics, how you calculate depreciation, partial depreciation as well as the sale of the asset all in one. Okay, So now we know the total accumulated depreciation since we own the asset is 7500. Okay, So now we can calculate the net book value and we can make our our journal entry. So let's go ahead and do this. Let's do our journal entry. We know we received cash of 36,000. Right? So that's definitely gonna be in our journal entry. Cash. 36,000. What else the accumulated depreciation? We got to get that off of our books. We sold the machine. So we no longer have that accumulated depreciation either. So accumulated depreciation. We gotta debit it right? It has a credit balance from our depreciation entries. Well, now we got a debit it to get rid of it. And that's gonna be 7500 right there. And what else we have the actual machines cost? Right? There's gonna be the the the asset value from when we originally purchased it of 52,000, we got to get that off of our books. And that's gonna be with the credit. Right, because that was an asset and we get rid of of the debit with this credit to machinery For 52,000. All right, so the last thing we gotta do is balance this entry right now with the credit to machinery? The debit to accumulated depreciation. We've gotten the asset off of our books. The debit to cash. What we received that cash. The last thing is gonna be the gain or the loss. So our total credits are 52,000. And our total debits at this point are 43,500. Right? So we gotta find the difference between the two. So here we go. The difference between the 52,000 and the 43 500 that we have in debits right now, that's gonna be 8500. Now, is that gonna be a loss? Or again, it's gonna be a loss, right? Because it's going to be on the debit side. Our debits are less than our credits. Now, we need more debits and we can only get these debits from this loss on the sale. So we have a loss on sale and that's gonna be for 8500. Right? And that's going to balance out our entry. And again, this was a plug, right? We plug that in to make our entry balance. So we always want to check if our debits and credits which one's bigger. And if we need more debits, it's a loss. If we need more credits, it's a game. But this should also make sense because if we look at the net book value of the asset on this day. Well, it was 52,000 - Our our accumulated depreciation of 7500. And what does that give us? 52000 -7500. That gives us 44,000. Whoops! 44,500 was our net book value. And what did we sell it for? 36,000? So the 36,000 cash we received minus the 44,500 in the netbook value that we gave up for it. Well, that equals are lost, right? We lost 8500. And that's the loss that went into our entry right there. Cool. So all the math checks out from whatever angle we approach it from. Cool. Alright, let's go ahead and fill this in. We've got cash, we received 36,000 in cash and we got rid of accumulated depreciation of 7500. That increased our assets. But then we got rid of machinery, right? And the machinery was 52,000. So that was a net decrease in our assets. If we take the 52,000 decrease and then we add the 36,000 at the 7500. Well, that gives us a net decrease of 8500. And that net decrease of 8500 is matched by this loss in equity. That's going to show up on our income statement of 8500 as well. So that's gonna bring down our equity and our equation stays balanced. Alright, let's go ahead and move on to the next video.