# Accounting for Exchange of Plant Assets

## Overview

In the business, the company may across a situation where it needs to exchange the old plant assets for the new one instead of just buying a new one. As the exchange of plant assets will usually result in a gain or a loss, the company usually needs to calculate the gain or loss on the exchange of plant assets as well as determine the cost of the new plant asset it exchanges the old one for before it can make the journal entry for such transaction.

In the exchange of plant assets, it is common that the company needs to pay some cash in addition to its old plant asset in order to receive the new plant asset. Likewise, any amount of cash paid in this transaction will be included in the cost of the new plant asset.

## Determine gain or loss on exchange of plant assets

Gain or loss on the exchange of plant assets can be determined by comparing the net book value of the plant assets (cost – accumulated depreciation) with its fair value at the time of exchange. It is rare that the net book value of the plant assets at the time of exchange will equal its fair value. Hence, a gain or loss tends to occur as a result of the exchange.

The company will have a gain on the exchange of plant assets if the fair value of the old plant asset is more than its net book value at the time of exchange.

Fair value > Net book value => Gain

On the other hand, the company will have a loss if the fair value of the old plant asset is less than its net book value at the time of exchange.

Fair value < Net book value => Loss

It is necessary to determine the actual fair value of the old plant asset that the company intends to exchange. The fair value of the old plant asset is not only used for determining the gain or loss on the exchange of plant assets but also used for determining the cost of the new plant asset that the company needs to record in the balance sheet at the time of exchange.

In this case, the cost of the new plant asset that the company exchanges the old asset for can be determined by the fair value of the old plant asset plus any amount of cash paid for the exchange.

Cost of new plant asset = Fair value of old plant asset + Cash paid

## Exchange of plant assets journal entry

Exchange of plant assets usually results in the gain or loss on the company side. Likewise, the journal entry for the exchange of plant asset that results in a gain will be a bit different from the one that results in a loss.

### Gain on exchange of plant assets journal entry

The company can make the journal entry for gain on exchange of plant assets by debiting the plant assets (new) and the accumulated depreciation account and crediting the gain on disposal of plant assets, plant assets (old), and cash account.

Account Debit Credit
Plant assets (new) 000
Accumulated depreciation 000
Gain on disposal of plant assets 000
Plant assets (old) 000
Cash 000

### Loss on exchange of plant assets journal entry

On the other hand, if the company makes a loss in exchange of plant assets, it can make the journal entry by debiting the loss amount to the loss on disposal of plant assets account.

Account Debit Credit
Plant assets (new) 000
Accumulated depreciation 000
Loss on disposal of plant assets 000
Plant assets (old) 000
Cash 000

## Exchange of plant assets example

For example, on June 1, the company ABC decides to exchange its old equipment for a new one in order to have a smoother operation in daily workflow. The net book value of the old equipment is \$30,000 which comes from the cost of \$50,000 less the accumulated depreciation of \$20,000.

The company ABC’s agent has determined that the old equipment has a fair value of \$25,000 at the time of exchange. Also, in exchange for the new equipment, the company ABC pays \$20,000 in addition to the old equipment.

What is the journal entry for the exchange of plant assets in this example?

Solution:

As the fair value of old equipment is less than its net book value at the time of exchange, the company ABC can determine the loss resulting in the exchange which will be recorded in the loss on disposal of plant assets account as below:

Loss = \$30,000 – \$25,000 = \$5,000

In this case, the company ABC can make the exchange of plant assets journal entry for the equipment as below:

Account Debit Credit
Equipment (new) 45,000
Accumulated depreciation – Equipment 20,000
Loss on disposal of plant assets 5,000
Equipment (old) 50,000
Cash 20,000

The \$45,000 cost of new equipment comes from the \$25,000 fair value of old equipment plus the additional cash paid for the exchange of \$20,000.

Example 2:

For example, assuming that the fair value of the old equipment that the company ABC exchanges for in the example above is \$37,000 instead.

If the fair value of old equipment is \$37,000 instead, the company ABC will have a gain on exchange of plant assets of \$7,000 (\$37,000 – \$30,000). Likewise, the journal entry for exchange of plant assets will have a gain instead of a loss as well as a \$57,000 cost of new equipment (\$37,000 + \$20,000) instead as below:

Account Debit Credit
Equipment (new) 57,000
Accumulated depreciation – Equipment 20,000
Gain on disposal of plant assets 7,000
Equipment (old) 50,000
Cash 20,000