The following pints highlight the two main reasons for exchange of plant assets. The reasons are: 1. Exchange of Dissimilar Plant 2. Exchange of Similar Plant.
Reason # 1. Exchange of Dissimilar Plant:
A plant asset may be exchanged for a similar asset, for example, an old machine traded in for a newer model or dissimilar assets, for example a machine being traded in for a truck. In either case, the purchase is reduced by the amount of trade-in-allowance given for the asset traded in.
The trade-in-allowance is not related to the used asset’s book value. If the trade-in-allowance received is greater than the book value of the asset surrendered, there is a gain. If the trade-in-allowance is less, there is a loss. Any gain or loss is determined by comparing the fair value assigned to the new asset with the total of the used asset’s book value plus any cash payment.
If the new asset’s fair value is larger, a gain is recorded. Should the used asset’s book value plus cash paid exceed the new asset’s fair value, a loss is found. It is significant to note that gains and losses are recognised when a business enterprise exchanges dissimilar asset.
Reason # 2. Exchange of Similar Plant:
When a plant asset is exchanged for a similar plant, loss is recognised but the gain is not. Gain is not considered because the earnings lives of the asset surrendered are not considered to be complete.
In this case the new asset is recorded at an amount equal to the sum of the book value of the asset traded in plus any cash paid. So acquiring a new similar asset does not result in an immediate gain to the business enterprise. In fact, this trade-in is merely an extension of the life and usefulness of the original machine.
Plant Asset Discarded:
If a fixed asset lasts longer than its estimated useful life and as a result is fully depreciated, it should not continue to be depreciated. That is, no depreciation should be done beyond the point the carrying value of the asset equals its residual value. If the residual value is zero, the book value of a fully depreciated asset is zero until the asset is disposed of.
If such an asset is discarded, no gain or loss results. If a fully depreciated asset is still used in the business, this fact should be supported by its cost and accumulated depreciation remaining in the asset account. If the asset is no longer used in the business, the cost and accumulated depreciation should be written off. Under all circumstances, the total accumulated depreciation should never exceed the total depreciable cost.