Future Business Leaders of America (FBLA) Accounting Practice Test

What does loss on plant assets mean?

1. The reduction of asset value due to depreciation

2. The decrease in equity resulting when a plant asset is sold for less than book value

3. The total cost incurred when buying an asset

4. The financial loss from operating expenses

The correct answer is: The decrease in equity resulting when a plant asset is sold for less than book value

Loss on plant assets refers specifically to the situation where a plant asset, such as buildings or machinery, is sold for an amount that is lower than its carrying amount, or book value, on the balance sheet. When this occurs, the loss is recognized as a decrease in equity because it adversely affects the net income of the business. This concept is important in accounting because it highlights the impact of asset disposal on a company's financial health. When a plant asset is no longer needed or becomes obsolete, if it is sold, the difference between the selling price and the book value represents a loss. This is crucial for financial reporting and evaluation of a company's performance, as it directly reduces retained earnings and affects the overall equity position of the business. Understanding this concept helps in evaluating how well a company manages its assets and the effects of asset management decisions on its financial statements.