Dispose of Plant Assets? From

¶ … dispose of plant assets?

From a qualitative standpoint, a business would first need to ascertain the useful life of the plant asset. This is particularly true for capital intensive businesses that rely heavily on fixed assets such as machinery or other manufacturing items. Using appropriate depreciation methods, businesses can provide educated guesses as to the useful life of assets. As such, they may elect to dispose of these assets when equipment with greater efficiencies is available. These efficiencies usually result in cost savings that outweigh the useful life of the older equipment. It may also be useful to dispose of plant assets when competitors are adopting new and innovative features that make the businesses plant equipment ineffective. For an example, it might be beneficial for business owners to use the internet as oppose to using phones to communicate. As such the business owner would dispose of limit the use of it physical phone equipment and replace it with internet infrastructure. This plant equipment may include routers, modems, data storage units, computers and much more. Initially these cost are heavy, however, the savings occurring through later years justifies the disposal of the older plant assets.

From a financial standpoint, it may be advantageous to dispose of plant assets when new plant assets provide a larger return. The larger return on assets may be larger than those of the older plant equipment. In this instance, it would be in the best interests of the business to adopt the new plant as the business can increase the incremental dollars the assets provide to the business. In many instances, sell the obsolete plant equipment for cash. In other instances the firm can trade it in for credit towards a more advanced system. This new system however, should be justified by either the cost savings or the increase in productivity that will ensue. Assets will also need to be disposed of when they depreciate substantially (Kaplan, 1987). There are three main forms of depreciation methods. These forms include:

1. Straight Line Depreciation -- an equal depreciation amount each year;

2. Units of Activity-- depreciation is based on asset's productivity rather than time passage;

3. Declining Balance -- an accelerated method which uses a fixed percentage of the asset's declining book value each year.

An asset may need to be replaced, bought or sold when it has outlived its useful life. For example, this can occur with trucks used in transporting goods and services. Overtime, their useful life depreciates. As such they will need to be traded in, or sold for cash to purchase new trucks.

What are the options for accounting for these dispositions?

In regards to accounting, irrespective if the firm sells the asset, trades the asset in, or discards it altogether, they will need to follow the ensuing steps.

1. Record the additional depreciation in the general journal. Update the plant asset record. Depreciation expense is recorded on a plant asset record at the end of a fiscal period. When discarding, selling, or trading an asset, the depreciation must be recorded year-to-date. If less than a year, the depreciation is prorated at the monthly amount.

2. Record the disposal in one of these journals -- discard, General Journal; sale, Cash Receipts; trade, Cash Payments.