How are disposals of plant assets accounted for?
In most cases, a company disposes a plant asset either through retirement, sales or sometimes
exchange. In a disposal by sale, the company compares the book value of the asset with the
proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant
asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the
plant asset sold, a loss on disposal occurs. If an asset is disposed of when it is fully depreciated
and has no residual value, then the business simply removes the asset and contra asset,
accumulated depreciation, from the books (Miller-Nobles, Mattison, and Matsuura, 2018, p.
554). When calculated gain or loss, don’t forget to update the accumulated depreciation account
(Miller-Nobles, Mattison, and Matsuura, 2018, p. 555).
How are natural resources and intangible assets accounted for? Why is this important?
Resources supplied by nature, such as ore deposits, mineral deposits, and timber stands, are
natural resources or wasting assets. Natural resources represent inventories of raw materials that
can be consumed (exhausted) through extraction or removal from their natural setting. Depletion
is how you depreciate natural asset reserves that have been mined or consumed. Natural
resources can be depleted, but not depreciated since they are usually consumed entirely during
their use.
Intangible assets are assets that have no physical form but exist to add a certain value to the
business. You cannot completely measure how much cash flow they bring in but you definitely
know they bring in some. Examples include patents, copyrights, trademarks, franchises, licenses,
and goodwill (Miller-Nobles, Mattison, and Matsuura, 2018, p. 571).
The company reports the account Depletion Expense (for natural resource) as a part of the cost of
producing the product. Accumulated Depletion is a contra-asset account, similar to accumulated
depreciation. It is deducted from the cost of the natural resource in the balance sheet. The same
goes for depreciation of plants assets but intagibles are recorded differently mostly as
amortization on a companys balance sheet. This helps to analyse the productivity of the
companys assets and how efficiently a company uses his assets to generate sales.
References
Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th
ed.). Retrieved from https://pearson.com