Question

Listed below are costs (or discounts) to purchase or construct new plant assets. Indicate whether the costs should be expensed or capitalized (included in the cost of the plant assets on the balance sheet.) For costs that should be, indicate in which category of plant assets (Equipment, Building, or Land) the related costs should be recorded on the balance sheet.

Proceeds received from selling scrap metal from old equipment being replaced

Answer 1

The scrap sales are income from sale of items which no longer have usefulness in terms of company selling it. Various costs and expenses are incurred while developing any new asset.

As definition says, any cost which is necessary to bring the asset to its usable condition has to be capitalised. Thus all costs which are required to bring the asset in working condition will be capitalised. Such cost is added to value of asset and deprecated over the life of asset. Expense which are incurred after establishment of asset are recurring cost and expensed out. Such cost are not added to value of asset.

Similarly their may be income which may be earned from selling of asset. Such asset if completely disposed off, then net book value is compared with the sale value and then income or loss has to be recognised.

We also need to keep in mind the concept of materiality. If the amount of scrap sales is material as to affect the decision of the user of financial statements, then such value should be reported separately.

Now there are instances where old asset is sold off and new asset is purchased. In such case of replacement, the net book value of Old asset is removed and replaced with the cost of new asset. However, it may happen that old asset is sold off and some income is earned. Such income has to be reduced from the cost of asset.

The reason for reduction, is the old asset is being replaced with new one. Had old one being sold and not being replaced, that is if it is not a simultaneous process then income is recognised. Where such process happens where old asset ur sold and new purchased, the cost of new asset is to be reduced.

In the question, the sale of Old scrap metal of equipment is done. Such income is to be reduced from cost of new equipment after comparing the sale value to net book value.