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
- The financial accounting term property, plant, and equipment is used to describe assets of a long lasting nature, which are used in the normal operation of the company. The most common types of property, plant, and equipment are land, buildings, and machinery.
Moneyzine EditorSeptember 21st, 2023 
The financial accounting term costs subsequent to acquisition refers to additional expenditures associated with property, plant and equipment. In general, companies make four types of investments in existing assets: additions to plant, improvements, reinstallations and repairs.Moneyzine EditorNovember 6th, 2024
The financial accounting term additions to property, plant, and equipment refers to one type of cost subsequent to acquisition. Additions are defined as an increase or expansion of these assets and the cost is typically capitalized.Moneyzine EditorJanuary 4th, 2024
The financial accounting term improvements and replacements refers to a category of cost subsequent to acquisition. A replacement occurs when a similar asset is substituted for the original asset, while an improvement involves the substitution for a more advanced asset.Moneyzine EditorNovember 6th, 2024- The financial accounting term reinstallation and rearrangement refers to a category of cost subsequent to acquisition. A rearrangement or reinstallation occurs when equipment is moved from one location and installed in another. This is typically performed to increase production at the receiving location.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term repairs to property, plant, and equipment refers to a category of cost subsequent to acquisition. Repairs are typically broken down into two subcategories: ordinary and major. Ordinary repairs are typically expensed, while major repairs may be capitalized if certain criteria are met.Moneyzine EditorSeptember 21st, 2023
- 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.Moneyzine EditorSeptember 21st, 2023
The term involuntary conversion refers to the unscheduled termination of property, plant, and equipment's service as the result of an unwanted event such as a fire, flood, or even theft. When the involuntary conversion of assets occurs, the company must compare the assets' original purchase price and accumulated depreciation to the disposition price to determine if there was a gain or loss on the conversion.Moneyzine EditorNovember 6th, 2024- The financial accounting term property, plant and equipment disclosures refer to the minimum information companies must divulge on their financial statements. Disclosure requirements fall into four categories: cost, accumulated depreciation, service lives, depreciation methods, capitalization thresholds, and restrictions.Moneyzine EditorNovember 6th, 2024
