Question

1. Describe the factors that determine whether expenditure relating to property, plant and equipment already in use should be capitalized.

2. Describe how to account for the gain or loss on the sale of property, plant and equipment.

Answer 1

1.

the expeniture relating to an item of property, plant and equipment already in use shall be recognized as an asset if, and only if:

• It is probable that future economic benefits associated with the expenditure item will flow to the entity; and
• The cost of the item can be measured reliably.

In nutshell if an expenditure is a capital expenditure and if above conditions are satisfied then Property,plant and equipment already in use should be capitalized.

2.

To calculate a gain or loss on the sale of an asset, compare the cash received to the carrying value of the asset. The following steps provide more detail about the process:

1. If the asset is a fixed asset, verify that it has been depreciated through the end of the last reporting period. If the asset had previously been classified as held for sale, it should not have been depreciated since it was classified as such, which is acceptable.
2. Verify that the amount of accumulated depreciation recorded for the asset matches the underlying depreciation calculation. If there is a difference (usually because the accumulated depreciation figure is too low), reconcile the two amounts and adjust the accounting records as necessary.
3. The original purchase price of the asset, minus all accumulated depreciation and any accumulated impairment charges, is the carrying amount of the asset. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss.
4. If there is a gain, the entry is a debit to the accumulated depreciation account, a credit to a gain on sale of assets account, and a credit to the asset account. If there is a loss, the entry is a debit to the accumulated depreciation account, a debit to the loss on sale of assets account, and a credit to the asset account.