Gains and losses on disposal of PPE

Property, plant and equipment (PPE) can be disposed off at any time. Either an item of PPE can be sold during its useful life or can be scrapped after its useful life. Whether sold or scrapped, disposal of PPE usually results in gain or loss as the sale proceeds are usually different from the carrying amount of PPE.

Gain or loss on disposal of PPE is calculated as follows:

  US Dollars US Dollars
Sale proceeds on disposal of PPE   xx
Less:    
Cost of asset xx  
Accumulated depreciation (xx)  
Accumulated impairment loss (if any) (xx)  
Carrying amount of PPE   (xx)
Gain/(loss) on disposal of PPE   xx

Let’s take a look at the following example to clarify the concepts related to disposal of PPE.

Example

A company has decided to dispose a machine to replace it with a new one. The company managed to sell the machine for $10,000 on 28 October 20xx. At the disposal date, following are the balances of accounts related to that machine.

  US Dollars
Machine’s cost 20,000
Accumulated depreciation (14,000)
Carrying amount 6,000

Let’s calculated the gain or loss on disposal of the machine.

  US Dollars
Sales proceeds 10,000
Less: Carrying amount at the date of disposal (6,000)
Gain on disposal of PPE 4,000

As the sales proceeds are higher than the machine’s carrying amount, therefore the company has earned a gain on disposal. If the sales proceeds were lesser that the machine’s carrying amount, the company would have suffered a loss on disposal.

Let’s see how journal entry for disposal of PPE is recorded in the accounting system.

Journal entry for disposal of PPE

Date Accounts Debit Credit
28 Oct Cash 10,000  
  Machine’s accumulated depreciation 14,000  
  Machine’s cost   20,000
  Gain on disposal of PPE   4,000