A loss on disposal of a plant asset is reported in the income statement in financial statements.
An asset when disposed is written off from the balance sheet. The book value of the assets is adjusted up-to the date at which the asset is disposed. Let me explain the treatment step by step:
- Take the cost of the asset. Suppose the cost of our plant asset is $100m.
- Calculate the accumulated depreciation of the plant asset up-to the date of disposal. For example, if an asset that was acquired on 13th Jan 2014 is disposed at 15th August 2020. The first step is to calculate accumulated depreciation from 13th Jan 2014 to 15th August 2020. Suppose the accumulated depreciation of our plant asset from 13-1-2014 to 15-08-2020 is $40m.
- Subtract the accumulated depreciation from the cost of the plant to arrive at net book value. In our example, Cost-Accumulated Depreciation ($100m-$40m=$60m)
- Compare the cash or cash equivalents received in consideration of the disposal of the plant asset with the net book value to calculate gain or loss on disposal of the plant asset. Suppose, we have received $50m cash in consideration of the disposal. This amount will appear in our Ledger Balance the next day.
Gain/(Loss)= $60m – $50m = ($10m)
- If the answer is positive, it shows gain on disposal of asset. If the answer is negative it means we have a loss on disposal of plant asset. In our example, our answer is negative i.e. -$10m. It means we have incurred a loss in disposal of plant.
- Show the loss of $10m as an expense in profit or loss statement. A loss in disposal of plant asset is shown in income statement as an expense (Subtracted from our profit).
- The asset is written off from the balance sheet.
- Cash received is shown as an asset in balance sheet.
- Loss on disposal is shown as an expense