 Eventually, plant assets need to be replaced. The most common reasons are that they wear out or become obsolete or just become too costly to continue to repair. Generally, there are three ways to dispose of plant assets. The first is to scrap or retire an asset. The second is to sell an asset. The third is to trade or exchange an old asset for a new one. This video will focus on the accounting for exchange of asset. But please note that this is a very simplified overview of this topic at an accounting principles level. In reality, accounting for exchanges in plant assets is far more complicated than what I'm going to demonstrate here. When we exchange plant assets, there are a few steps we need to do in order to make the proper journal entry. The first step is to record depreciation expense as of the scrap date. It is unlikely that accumulated depreciation account has the correct balance already. Next we need to remove the asset from our balance sheet. We do this by zeroing out the plant asset and accumulated depreciation account. Additionally, we need to record the new asset as well as any cash paid in the transaction. Finally, we need to record any gain or loss related to the exchange of assets. Let me go over a few of the rules that guide us in recording journal entries for the exchange of assets. To begin with, they are commonly called non-monetary exchanges. The basis for the amounts recorded in the transaction is fair market values. Assets are recorded at their cost, and the cost of a new plant asset received is equal to the fair value of the old asset given up, plus any cash paid. Finally, gains or losses occur when the fair value of what we give up is different than the book value of the assets given up. Let's look at an example. Charlotton's UK trades an old delivery truck and $40,000 cash on June 30th, 2018 for a new truck that has a sticker price of $50,000. The old truck's original cost was $40,000 and it is worth $8,000 on June 30th. As of June 30th, the total amount of accumulated depreciation was $30,000. So what is the fair value of the assets given up? Well, we paid cash of $40,000 plus traded an old truck worth $8,000 for a total of $48,000. This becomes the cost of the new truck. Alright, so now let's record the journal entry to exchange these assets on June 30th. I think the simplest way to record disposal of assets journal entries is to start with the accounts and amounts you know. In this case, we need to debit truck, that's the new truck, for $48,000. We calculated this amount just two slides earlier. Also we need to debit accumulated depreciation and the balance is $30,000. This will remove accumulated depreciation from our books. We also need to credit truck, and that's the old truck, and its balance is $40,000. This will remove the old truck from our books. We also need to credit cash for $40,000 as this is the amount we paid for the new truck. So you can see this journal entry doesn't balance. We need a debit for $2,000 to make it balance. So I am missing a debit amount for $2,000. In this case, we incurred a loss of $2,000 when exchanging assets. Losses are like expenses. They have normal debit balances and they decrease net income.