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Chapter 9: Q10SE (page 527)

Selling an asset at gain or loss Peter Company purchased equipment on January 1, 2018, for \(28,000. Suppose Peter Company sold the equipment for \)4,000 on December 31, 2019. Accumulated Depreciation as of December 31, 2019, was $11,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

Short Answer

Expert verified

The business entity will incur $13,000 as a loss on the sale.

Step by step solution

01

Definition of straight-line Method

The method of calculating the depreciation under which each year of the useful life of the asset reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life.

02

Preparing Journal Entries on the sale of the Equipment of Loss Peter Company

Date

Account & Explanation

Debit ($)

Credit ($)

31 Dec 2019

Cash

$4,000

Accumulated depreciation

$11,000

Loss on sale of equipment

$13,000

Equipment

$28,000

(To record the sale of equipment)

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Most popular questions from this chapter

Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?

3. How would an organization prevent the kind of fraud depicted here?

What does the word capitalize mean?

Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectives

On January 3, 2018, Rapid Delivery Service purchased a truck at a cost of \(100,000. Before placing the truck in service, Rapid spent \)3,000 painting it, \(600 replacing tires, and \)10,400 overhauling the engine. The truck should remain in service for five years and have a residual value of $12,000. The truck’s annual mileage is expected to be 32,000 miles in each of the first four years and 8,000 miles in the fifth year—136,000 miles in total. In deciding which depreciation method to use, Andy Sargeant, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).

Requirements

1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.

2. Rapid prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Rapid uses the truck. Identify the depreciation method that meets the company’s objectives.

This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are continuing to review business practices. Currently, theyare reviewing the company’s property, plant, and equipment and have gathered thefollowing information:

Asset

Acquisition Date

Cost

Estimated Life

Estimated Residual value

Depreciation Method

Monthly Depreciation Expense

Canoes

Nov. 3, 2018

\(4,800

4 Years

\) 0

SL

$100

Land

Dec 1, 2018

85,000

n/a

Building

Dec 1, 2018

35,000

5 Years

5,000

SL

500

Canoes

Dec 2, 2018

7,200

4 Years

0

SL

150

Computer

Mar. 2, 2019

3,600

3 Years

300

DDB

Office Furniture

MAR. 3, 2019

3,000

5 Years

600

SL

*SL = Straight@line; DDB = Double@declining@balance

Requirements

1. Calculate the amount of monthly depreciation expense for the computer andoffice furniture for 2019.

2. For each asset, determine the book value as of December 31, 2018. Then, calculatethe depreciation expense for the first six months of 2019 and the book valueas of June 30, 2019.

3. Prepare a partial balance sheet showing Property, Plant, and Equipment as ofJune 30, 2019.

Accounting for goodwill

Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel’s balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel’s assets was \)100,000. The fair market value of Thrifty Nickel’s liabilities was $70,000.

Requirements

  1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel?
  2. Journalize Decca Publishing’s acquisition of Thrifty Nickel
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