Retirement of Plant Assets Journal Entry
Introduction
The company usually needs to dispose of the plant assets that are no longer useful in the business operation. Likewise, the retirement of plant assets is one option that the company usually uses for disposal of the asset when it cannot be sold.
In this case, the journal entry for the retirement of plant assets may result in the loss that needed to be recorded as an expense in the income statement.
If the plant asset is fully depreciated, there won’t a loss from the retirement. Otherwise, if the plant asset is retired before it is fully depreciated, there will be a loss in the amount of remaining net book value of the asset.
Retirement of plant assets journal entry
If a plant asset is retired and is fully depreciated, the company can make the journal entry by debiting the accumulated depreciation account and crediting the plant assets account.
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | $$$ | |
| Plant assets | $$$ |
This journal entry is made to remove the retired plant asset from the balance sheet. As the plant asset is fully depreciated (i.e. cost equals the accumulated depreciation), there is no loss from the retirement of the asset.
On the other hand, if a plant asset is retired but is not fully depreciated yet, the company needs to recognize the remaining net book value of the plant asset as a loss from disposal of plant assets.
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | $$$ | |
| Loss on disposal of plant assets | $$$ | |
| Plant assets | $$$ |
Example
For example, on January 15, 2021, the company ABC retires an office equipment item which is a plant asset that costs $10,000.
What is the journal entry for the retirement of the plant asset above?
- If it is fully depreciated at the time of retirement.
- If it is not fully depreciated and its accumulated depreciation is $8,000 on January 15, 2021.
Solution:
The plant asset is fully depreciated
If the plant asset above is fully depreciated, the company ABC can make the journal entry for the retirement of the plant asset as below:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation – Equipment | 10,000 | |
| Equipment | 10,000 |
The plant asset is not fully depreciated
On the other hand, if the office equipment is not fully depreciated, the company ABC can make the journal entry on January 15, 2021, to recognize the loss of $2,000 (10,000 – 8,000) from the retirement of plant asset as below:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation – Equipment | 8,000 | |
| Loss on disposal of plant assets | 2,000 | |
| Equipment | 10,000 |
Loss on disposal of plant assets is the income statement item that is usually recorded in the section of other expenses.
