Chapter 11, Problem 16E

1.

To determine

Prepare journal entries of company S for the given transaction.

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.
• Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed for less than its book value.

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

1. a.      Prepare journal entries to record the sale of truck for $12,000.

Date	Account Title & Explanation	Debit ($)	Credit($)
April 1, 2016	Depreciation expense (2)	1,850
	Accumulated depreciation-Truck		1,850
	(To record the depreciation expense)

Table (1)

• Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $1,850. Therefore, debit depreciation expense account with $1,850.
• Accumulated depreciation is a contra asset, and it decreases the value of asset by $1,850. Therefore, credit accumulated depreciation account with $1,850.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
April 1, 2016	Cash		12,000
	Accumulated Depreciation –Truck (3)		31,450
	Gain from sale of Truck (4)			1,450
	Truck			42,000
	(To record the gain from disposal of equipment)

Table (2)

• Cash is an asset, and it increases the value of assets by $12,000. Therefore, debit the cash account with $12,000.
• Accumulated depreciation is a contra asset, and it increases the asset by $31,450. Therefore, debit Accumulated depreciation with $31,450.
• Truck is an asset, and it decreases the value of assets by $42,000. Therefore, credit truck account by $42,000.
• Gain from sale of truck is revenue of the company and it increases the value of equity by $1,450. Therefore, credit gain on sale of truck account with $1,450.

Working note (1):

Calculate the depreciation expenses:

$\begin{array}{c}\text{Depreciation expenses}=\frac{\text{Acquisition cost}-\text{Residual value}}{\text{Estimated life}}\\ =\frac{\text{\$42,000}-\$5,000}{\text{5 years}}\\ =\$7,400\text{ per year}\end{array}$

Working note (2):

Calculate the depreciation expenses for the period December 31, 2015 to April 1, 2016:

$\begin{array}{c}\text{Depreciation expenses}=\left[\begin{array}{l}\text{Depreciation}\\ \text{expenses}\end{array}\right]\times \left[\frac{\begin{array}{l}\text{Depreciation expenses incurred during}\\ \text{December 31, 2015 to April 1, 2016}\end{array}}{\text{Number months in a year}}\right]\\ =\$7,400\times \frac{3\text{ months}}{\text{12}}\\ =\$1,850\text{ per year}\end{array}$

Working note (3):

Calculate the accumulated depreciation:

$\begin{array}{c}\text{Accumulated Depreciation}=\left[\begin{array}{l}\text{Acquisition cost}\\ -\text{Book value}\end{array}\right]+\left[\begin{array}{l}\text{depreciation expenses}\\ \text{for the period December}\\ \text{31, 2015 to April 1, 2016}\end{array}\right]\\ =\left[\$42,000-\$12,400\right]+\$1,850\\ =\text{\$29,600}+\$1,850\\ =\$31,450\end{array}$

Working note (4):

Calculate the gain or loss on disposal of equipment:

 $\begin{array}{c}\text{Gain on disposal =Sale value}-\left(\begin{array}{l}\text{Original value of machinery}\\ -\text{Accumulated depreciation (3)}\end{array}\right)\\ =\$12,000-\left(\$42,000-\$31,450\right)\\ =\$12,000-\$10,550\\ =\$1,450\end{array}$

1. b.      Prepare journal entries to record the sale of truck for $9,000.

Date	Account Title & Explanation	Debit ($)	Credit($)
April 1, 2016	Depreciation expense (2)	1,850
	Accumulated depreciation-Truck		1,850
	(To record the depreciation expense)

Table (3)

• Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $1,850. Therefore, debit depreciation expense account with $1,850.
• Accumulated depreciation is a contra asset, and it decreases the value of asset by $1,850. Therefore, credit accumulated depreciation account with $1,850.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
April 1, 2016	Cash		9,000
	Accumulated Depreciation –Truck (3)		31,450
	Loss from sale of Truck (5)		1,550
	Truck			42,000
	(To record the gain from disposal of equipment)

Table (4)

• Cash is an asset, and it increases the value of assets by $9,000. Therefore, debit the cash account with $9,000.
• Accumulated depreciation is a contra asset, and it increases the asset by $31,450. Therefore, debit Accumulated depreciation with $31,450.
• Loss from sale of truck is an expense for the company and it decreases the value of equity by $1,550. Therefore, debit loss on sale of truck account with $1,550.
• Truck is an asset, and it decreases the value of assets by $42,000. Therefore, credit truck account by $42,000.

Working note (5):

Calculate the gain or loss on disposal of equipment:

 $\begin{array}{c}\text{Loss on disposal =Sale value}-\left(\begin{array}{l}\text{Original value of machinery}\\ -\text{Accumulated depreciation (3)}\end{array}\right)\\ =\$9,000-\left(\$42,000-\$31,450\right)\\ =\$9,000-\$10,550\\ =\$(1,550)\end{array}$

2.

To determine

Describe the manner in which the gain or loss on disposal of the asset be reported on the income statement of company S.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

The gain or loss on disposal of the truck is reported in the income from continuing operations and this comes under the heading “other income and expense section” of the income statement of the company.

3.

To determine

Prepare journal entries of company S for the sale of truck under IFRS method.

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.
• Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed for less than its book value.

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Prepare journal entries to record the sale of truck for $12,000.

Date	Account Title & Explanation	Debit ($)	Credit($)
April 1, 2016	Depreciation expense (2)	1,850
	Accumulated depreciation-Truck		1,850
	(To record the depreciation expense)

Table (5)

• Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $1,850. Therefore, debit depreciation expense account with $1,850.
• Accumulated depreciation is a contra asset, and it decreases the value of asset by $1,850. Therefore, credit accumulated depreciation account with $1,850.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
April 1, 2016	Cash		12,000
	Accumulated Depreciation –Truck (3)		31,450
	Gain from sale of Truck (4)			1,450
	Truck			42,000
	(To record the gain from disposal of equipment)

Table (6)

• Cash is an asset, and it increases the value of assets by $12,000. Therefore, debit the cash account with $12,000.
• Accumulated depreciation is a contra asset, and it increases the asset by $31,450. Therefore, debit Accumulated depreciation with $31,450.
• Truck is an asset, and it decreases the value of assets by $42,000. Therefore, credit truck account by $42,000.
• Gain from sale of truck is revenue of the company and it increases the value of equity by $1,450. Therefore, credit gain on sale of truck account with $1,450.

Note:

Company S would record depreciation up to the date of disposal and the entries for disposal should be recorded similar to U.S. GAAP. However, company S would remove the previously recorded revaluation surplus.

Prepare journal entries to record the revaluation surplus.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
April 1, 2016	Revaluation Surplus		4,000
	Retained Earnings			4,000
	(To record the revaluation surplus related to the machine)

Table (7)