When a plant asset is sold for less than its book value
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A. B. C. D.A
Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost - Accumulated Depreciation) from the cash received.
When a plant asset is sold for less than its book value, the correct answer is option B: original cost minus accumulated depreciation equals cash received minus loss on disposal.
Let's break down each element of the equation to understand why this answer is correct:
Original cost: The original cost refers to the initial cost incurred to acquire the plant asset. It includes the purchase price and any other costs directly attributable to acquiring and preparing the asset for its intended use, such as transportation and installation costs.
Accumulated depreciation: Over the useful life of a plant asset, depreciation is recorded to allocate its cost over time and reflect its gradual loss in value due to wear and tear, obsolescence, or other factors. Accumulated depreciation represents the total depreciation expense recognized for the asset since its acquisition.
Book value: The book value of an asset is calculated by subtracting the accumulated depreciation from the original cost. It represents the net value of the asset on the balance sheet, reflecting the remaining value after accounting for the depreciation expense.
Cash received: When an asset is sold, the company receives cash from the buyer. This cash inflow represents the proceeds from the sale of the asset.
Loss on disposal: When an asset is sold for less than its book value, a loss on disposal occurs. The loss on disposal reflects the difference between the book value of the asset and the amount received from its sale. It indicates that the company incurred a loss by selling the asset at a price lower than its recorded value.
Now, let's analyze option B: original cost minus accumulated depreciation equals cash received minus loss on disposal.
In this equation, we start with the original cost, which represents the initial cost of the asset. We subtract the accumulated depreciation, which represents the total depreciation expense recognized over time. This gives us the net book value of the asset.
Next, we look at the right side of the equation. Cash received represents the amount of cash received from the sale of the asset. We subtract the loss on disposal, which represents the loss incurred by selling the asset for less than its book value.
If the asset is sold for less than its book value, the cash received will be lower than the net book value. This is because the company is receiving less cash than the recorded value of the asset. The loss on disposal reflects this difference and represents the loss incurred by the company.
Option B correctly states that the original cost minus accumulated depreciation equals cash received minus loss on disposal. This equation accurately represents the financial impact of selling a plant asset for less than its book value.