Concept explainers
Demonstrating the Effect of Book Value on Reporting an Asset Disposal
FedEx Corporation is the world’s leading express-distribution company. In addition to the world’s largest fleet of all-cargo aircraft, the company has more than 54,000 ground vehicles that pick up and deliver packages. Assume that FedEx sold a delivery truck for $16.000. FedEx had originally purchased the truck for $28,000 and had recorded
Required:
- 1. Calculate the amount of gain or loss on disposal, assuming that
Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $15.000. - 2. Using the following structure, indicate the effects (accounts, amounts, and + or −) for the disposal of the truck, assuming that Accumulated Depreciation was (a) $12.000, (b) $10,000, and (c) $15,000.
- 3. Based on the three preceding situations, explain how the amount of depreciation recorded up to the time of disposal affects the amount of gain or loss on disposal.
- 4. Prepare the
journal entry to record the disposal of the truck, assuming that Accumulated Depreciation was (a) $12,000, (b) $10.000, and (c) $15,000.
1.
To calculate: The amount of gain or loss on disposal, assuming that the Accumulated depreciation was a) $12,000, b) $10,000, and c) $15,000.
Answer to Problem 9E
Calculate the amount of gain or loss on disposal of Equipment.
a) Assuming the accumulated depreciation is $12,000.
Book value of the Equipment is calculated as follows:
Hence, Book value of the Equipment is $16,000.
Gain or loss on disposal of Equipment is as follows:
Therefore, there is no gain and no loss at assumed accumulated depreciation of $12,000.
b)Assuming the accumulated depreciation is $10,000.
Book value of the Equipment is calculated as follows:
Hence, Book value of the Equipmentis $18,000.
Gain or loss on disposal of Equipment is as follows:
Therefore, there is $2,000 loss on disposal of Equipment at assumed accumulated depreciation of $10,000.
c) Assuming the accumulated depreciation is $15,000.
Book value of the Equipment is calculated as follows:
Hence, Book value of the Equipmentis $13,000.
Gain or loss on disposal of Equipment is as follows:
Therefore, there is $3,000 gain on disposal of Equipment at assumed accumulated depreciation of $15,000.
Explanation of Solution
Disposal of Assets:
Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:
- Disposal with no gain no loss: When the asset is disposed with no consideration received, it is referred as disposal with no gain no loss.
- Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation on equipment).
- Disposal with loss: When the asset is disposed for less than its book value of the equipment.
- a) At assumed accumulated depreciation of $12,000, there is neither gain nor loss on disposal of Equipment.
- b) At assumed accumulated depreciation of $10,000, there is $2,000 loss on disposal of Equipment.
- c) At assumed accumulated depreciation of $15,000, there is $3,000 gain on disposal of Equipment.
2.
To indicate: the effects (accounts, amounts. and + or -) for the disposal of the Equipment, assuming that Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.
Explanation of Solution
Indicate the effects (accounts, amounts. and + or -) for the disposal of the Equipment, assuming that Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||
a. | Cash | +16000 | ||||||
Equipment | –28,000 | |||||||
Accumulated Depreciation (− A) | + 12000 | |||||||
b. | Cash | + 16000 | Loss on Disposal (+E) | -2000 | ||||
Equipment | –28,000 | |||||||
Accumulated Depreciation (− A) | + 10000 | |||||||
c. | Cash | + 16000 | Gain on Disposal (+R) | + 3000 | ||||
Equipment | –28,000 | |||||||
Accumulated Depreciation (− A) | + 15000 |
Table (1)
Explanation:
- a. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $12,000.
- b. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $10,000. Loss on disposal of Equipment decreases the retained earnings by $2,000.
- c. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $15,000. Gain on disposal of Equipment increases the retained earnings by $3,000.
3.
To explain: the amount of depreciation recorded up to the time of disposal affects the amount of gain or loss on disposal.
Explanation of Solution
By comparing situationsfrom a, b andc above, the gain or loss reported on disposal is directly affected by the book value of the asset. The book value of the asset is affected by the amount of depreciation recorded before the disposal.
The higher the amount of depreciation recorded before a disposal, the more possibility that the asset will generate a gain on disposal (situation c).
The lesser the amount of depreciation recorded before a disposal, the more possibility that the asset will generate a loss on disposal (situation b).
4.
To prepare: the journal entries to record the disposal of the Equipment, assuming that the accumulated depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.
Answer to Problem 9E
Prepare the journal entries to record the disposal of the Equipment, assuming that the accumulated depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.
- (a) Assuming that the accumulated depreciation was $12,000.
Date | Account title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
Cash | 16,000 | |||
Accumulated depreciation- Equipment | 12,000 | |||
Equipment | 28,000 | |||
(To record the disposal of the Equipment) |
Table (1)
- (b) Assuming that the accumulated depreciation was $10,000.
Date | Account title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
Cash | 16,000 | |||
Accumulated depreciation- Equipment | 10,000 | |||
Loss on disposal of Equipment | 2,000 | |||
Equipment | 28,000 | |||
(To record the disposal of the Equipment) |
Table (2)
- (c) Assuming that the accumulated depreciation was $15,000.
Date | Account title and Explanation | Post Ref. | Debit ($) |
Credit ($) |
Cash | 16,000 | |||
Accumulated depreciation- Equipment | 15,000 | |||
Equipment | 28,000 | |||
Gain on disposal of Equipment | 3,000 | |||
(To record the disposal of the Equipment) |
Table (3)
Explanation of Solution
a) Assuming that the accumulated depreciation was $12,000.
- Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
- Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $12,000.
- Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.
b) Assuming that the accumulated depreciation was $10,000.
- Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
- Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $10,000.
- Loss on disposal of Equipment is an element of retained earnings. Loss decreases the retained earnings. Thus, loss on disposal of Equipment is debited with $2,000.
- Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.
c) Assuming that the accumulated depreciation was $15,000.
- Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
- Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $15,000.
- Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.
- Gain on disposal of Equipment is an element of retained earnings. Gain increases the retained earnings. Thus, gain on disposal of Equipment is credited with $3,000.
Want to see more full solutions like this?
Chapter 9 Solutions
Fundamentals Of Financial Accounting
- Required information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below] NewTech purchases computer equipment for $261,000 to use in operating activities for the next four years at estimates the equipment's salvage value at $30,000. Exercise 8-8 (Algo) Double-declining-balance depreciation LO P1 Prepare a table showing depreciation and book value for each of the four years assuming double-declining balance depreciation, Note: Enter all amounts as positive values. Year Year 1 Year 2 Year 3 Year 4 Total Depreciation for the Period Beginning-Year Depreciation - Book Value Rate Annual thepreciation 3 End of Period Accumulated Depreciation Year-End Book Valusarrow_forwardRequired information [The following information applies to the questions displayed below.] NewTech purchases computer equipment for $271,000 to use in operating activities for the next four years. It estimates the equipment's salvage value at $25,000. Prepare a table showing depreciation and book value for each of the four years assuming double-declining-balance depreciation. (Enter all amounts as positive values.) Year Year 1 Year 2 Year 3 Year 4 Total Beginning- Year Book Value $ Depreciation for the Period Depreciation Rate Answer is not complete. 271,000 135,500 67,750 33,875 Annual Depreciation 50% $ 135,500 50% 67,750 33,875 50% 50% $ 237,125 End of Period Accumulated Depreciation $ 135,500 Year-End Book Value $ 135,500 67,750 33,875arrow_forwardRequired information [The following information applies to the questions displayed below.] NewTech purchases computer equipment for $264,000 to use in operating activities for the next four years. It estimates the equipment's salvage value at $28,000. Prepare a table showing depreciation and book value for each of the four years assuming double-declining-balance depreciation. (Enter all amounts as positive values.) Depreciation for the Period End of Period Year Beginning-Year Depreciation Book Value Rate Annual Accumulated Depreciation Depreciation Year 1 Year 2 Year 3 Year 4 Total Year-End Book Valuearrow_forward
- Required information Use the following information for the Exercises below. [The following information applies to the questions displayed below.] On April 1, Cyclone's Co. purchases a trencher for $302,000. The machine is expected to last five years and have a salvage value of $51,000. Exercise 8-11 Straight-line, partial-year depreciation LO C2 Compute depreciation expense at December 31 for the first and second year assuming the company uses the straight-line method. Choose Numerator: Choose Denominator: Annual Depreciation Annual depreciation Depreciation Expense Year Annual Depreciation Fraction of Year First year Second yeararrow_forwardRequired information [The following information applies to the questions displayed below.] On April 1, Cyclone Company purchases a trencher for $290,000. The machine is expected to last five years and have a salvage value of $45,000. Compute depreciation expense at December 31 for both the first year and second year assuming the company uses the straight-line method. Choose Numerator: Year First year Second year Annual Depreciation Choose Denominator: Fraction of Year Annual Depreciation = Annual depreciation = Depreciation Expense 0arrow_forwardRequired information Use the following information for the Exercises below. [The following information applies to the questions displayed below.] On April 1, Cyclone Co. purchases a trencher for $280,000. The machine is expected to last five years and have a salvage value of $40,000. Exercise 8-12 Double-declining-balance, partial-year depreciation LO C2 Compute depreciation expense at December 31 for both the first year and second year assuming the company uses the double- declining-balance method. (Enter all amounts as positive values.) Depreciation for the Period End of Period. Beginning of Period Book Value Depreciation Rate Depreciation Expense Accumulated Annual Period Partial Year Book Value Depreciation Yoor 1arrow_forward
- Required information [The following information applies to the questions displayed below.] On April 1, Cyclone Company purchases a trencher for $320,000. The machine is expected to last five years and have a salvage value of $60,000. Compute depreciation expense at December 31 for both the first year and second year assuming the company uses the straight-line method. Choose Numerator: Choose Denominator: Annual Depreciation Fraction of Year Depreciation Expense Year First year Second year Annual Depreciation X = Annual depreciationarrow_forwardMontello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montellos depreciation expense each year and what the trucks book value will be each year after depreciation expense is recorded.arrow_forwardBenson Company acquired a machine that involved the following expenditures and related factors: Gross invoice price $38,000 Sales tax 1,425 Cash discount taken 570 Freight 675 Assembly of machine 900 Installation of machine 1,350 Assorted spare parts for future use 2,700 Tuning and adjusting machine before use 450 The initial accounting cost of the machine should be: Select one: a. $33,870 b. $42,230 c. $30,030 d. $32,730 e. None of the abovearrow_forward
- Use the following information for the Exercises below. (Algo) Skip to question [The following information applies to the questions displayed below.] NewTech purchases computer equipment for $272,000 to use in operating activities for the next four years. It estimates the equipment’s salvage value at $20,000. Exercise 8-8 (Algo) Double-declining-balance depreciation LO P1 Prepare a table showing depreciation and book value for each of the four years assuming double-declining-balance depreciation. (Enter all amounts as positive values.)arrow_forwardRequired information E9-11 (Algo) Demonstrating the Effect of Book Value on Reporting an Asset Disposal [LO 9-5] [The following information applies to the questions displayed below.] OnTime Packaging is the world's leading express-distribution company. In addition to its 643 aircraft, the company has more than 57,000 ground vehicles that pick up and deliver packages. Assume that OnTime sold a delivery truck for $22,000. OnTime had originally purchased the vehicle and recorded it in the Truck account for $37,000 and had recorded depreciation for three years. E9-11 (Algo) Part 4 4. Prepare the journal entry to record the disposal of the truck, assuming Accumulated Depreciation--Truck was (a) $15,000, (b) $13,000, and (c) $21,000. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) No Transaction General Journal 1 Cash Truck Accumulated Depreciation-Truck Debit Credit 22,000 37,000 15,000 2 b Cash 22,000 Accumulated…arrow_forwardRequired information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below] On April 1, Cyclone Company purchases a trencher for $300,000. The machine is expected to last five years and have a salvage value of $50,000 Exercise 8-12 (Algo) Double-declining-balance, partial-year depreciation LO C2 Compute depreciation expense at December 31 for both the first year and second year assuming the company uses the double- declining-balance method Note: Enter all amounts as positive values. Annual Period Beginning of Period Book - Value Year 1 Year 2 Depreciation for the Period Depreciation Partial Rate Year Depreciation Expense Accumulated Depreciation 5 End of Period $ Book Value 05 0 $ 0 0 3arrow_forward
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College