Future Business Leaders of America (FBLA) Accounting Practice Test

What does "loss on plant assets" indicate?

1. Income from selling plant assets at book value

2. Revenue from selling a plant asset for less than its book value

3. A change in value of the remaining plant assets

4. An increase in depreciation expense

The correct answer is: Revenue from selling a plant asset for less than its book value

"Loss on plant assets" signifies that a company has sold a plant asset for an amount lower than its book value, which is the value of the asset recorded in the company's financial statements. When this occurs, it reflects a reduction in the asset's value due to wear and tear, obsolescence, or market conditions that affect its selling price. This loss adversely impacts the company's financial results because it results in a negative entry on the income statement, reducing overall profitability. The concept is important for accurately reporting a company's financial position, as it helps stakeholders understand the economic realities faced by the company regarding asset management and performance. Understanding this metric aids in financial analysis and decision-making processes about asset utilization and replacement strategies. The other options do not accurately reflect the meaning of a loss on plant assets. For example, selling an asset for its book value would imply no gain or loss; a change in remaining asset values doesn't specifically relate to a loss on individual asset sales, and an increase in depreciation expense pertains to accounting for asset value reduction over time rather than the outcome of an asset sale.