Future Business Leaders of America (FBLA) Accounting Practice Test

What signifies a gain on plant assets?

1. The asset sold for less than its book value

2. The asset sold for more than its book value

3. The asset was disposed of without profit

4. The asset was written off as a loss

The correct answer is: The asset sold for more than its book value

A gain on plant assets occurs when the asset is sold for more than its book value. Book value is the value of the asset recorded on the balance sheet, which is typically the original cost minus any accumulated depreciation. When an asset is sold for a price exceeding this booked amount, the difference between the sale price and the book value is recognized as a gain. This gain reflects positively on a company's financial performance because it indicates that the asset was able to generate more cash than its remaining value on the books. In terms of accounting, this gain is often recognized in the income statement, contributing to the net income of the reporting period. In contrast, when an asset is sold for less than its book value or disposed of without profit, it is recorded as a loss, which negatively affects the company's financial statements. Recognizing and reporting gains and losses correctly is crucial for accurately showcasing a company's financial health.