If a piece of PPE is disposed of for an amount greater than its book value, what is recognized?

• A. A gain on disposal equal to the difference between proceeds and book value.
• B. A loss on disposal equal to the difference between proceeds and book value.
• C. No gain or loss is recognized.
• D. Revenue equal to book value is recognized.

Answer: (A)

When PPE is disposed, you remove the asset and its accumulated depreciation from the books and compare the cash received to the asset’s net book value (cost minus accumulated depreciation). If the proceeds exceed the net book value, a gain on disposal is recognized for that excess, and it goes into income. If proceeds are less than net book value, a loss is recognized; if they’re equal, no gain or loss is recorded.

For example, if an asset cost 100 and has 70 of accumulated depreciation, the net book value is 30. If you dispose of it for 40, the gain is 10 (40 − 30). The journal would reflect the cash received and the removal of the asset and depreciation, with the 10 difference recorded as a gain on disposal. This is why recognizing a gain equal to the difference between proceeds and book value is the correct treatment when disposal proceeds exceed book value.