n further developing its other division. The capital E account), were purchased January 1, 2016 with a iation is $33,000. The fair value of the building on - 12,000. ome statement on December 31, 2020 of the entit is as follows: $8,600,000 $3,500,000 Revenue Cost of goods sold
n further developing its other division. The capital E account), were purchased January 1, 2016 with a iation is $33,000. The fair value of the building on - 12,000. ome statement on December 31, 2020 of the entit is as follows: $8,600,000 $3,500,000 Revenue Cost of goods sold
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:On July 31, 2020, Lee Co. a public company decides to put one of the divisions up for sale so that it can
focus on further developing its other division. The capital assets of the division up for sale (recorded to
the PPE account), were purchased January 1, 2016 with an original cost of $990,000. The annual
depreciation is $33,000. The fair value of the building on July 31, 2020 was $840,000. The costs to sell
were $12,000.
The income statement on December 31, 2020 of the entity before any adjustments for the asset held for
sale was as follows:
$8,600,000
$3,500,000
$1,000,000
$240,000
$1,200,000
$798,000
Revenue
Cost of goods sold
Administrative expenses
Depreciation expense
Other Expenses
Income tax expense
Net income
1,862,000
The income statement details for the asset held for sale is as follows:
$3,200,000
$1,600,000
$300,000
$33,000
$400,000
$260,100
$606,900
Revenue
Cost of goods sold
Administrative expenses
Depreciation expense
Other Expenses
Income tax expense
Net income
Required:
(a) Prepare the journal entries to record the depreciation for the PPE and their reclassification as
held for sale in 2020. Assume value in use is lower than net realizable value.
(b) Prepare a revised statement of income for the year ended December 31, 2020 in good form.
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