Chapter 9, Problem 5AP

To determine

Prepare journal entries to record the following transactions.

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 of with no consideration received.
• Disposal with gain: When the asset is disposed of for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed of for less than its book value.

a.

Prepare a journal entry to record the depreciation expense to the date of disposal as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Depreciation Expense - Plane		650,000
	Accumulated Depreciation - Plane			650,000
	(Recorded depreciation expense.)

Table (1)

Working Notes:

Compute the annual depreciation:

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\\ =\frac{\$850,000-\text{ \$70,000}}{\text{8 Years}}\\ =\$97,500\text{ per year}\end{array}$

Compute the partial year depreciation expense for the seventh year:

The plane has used eight months in the seventh year.

Annual depreciation expense = $97,500

$\begin{array}{c}\begin{array}{l}\text{Depreciation Expense }\\ \text{for 8 Months}\end{array}\}=\text{ Annual Depreciation }\times \frac{8}{12}\\ =\$97,500\times \frac{8}{12}\\ =\$65,000\end{array}$

Calculate the depreciation expense to the date of disposal:

The plane has used 6 years and 8 Months.

$\begin{array}{c}\begin{array}{l}\text{Depreciation Expenses}\\ \text{ to the Date of Disposal}\end{array}]=\left[\begin{array}{l}\text{Depreciation Expense for 6 years }\\ +\text{ Depreciation Expense for 8 Months}\end{array}\right]\\ =\left(\$97,500\times 6\text{Years}\right)+\$65,000\\ =\$585,000+\$65,000\\ =\$650,000\end{array}$

• Depreciation expense is an expense, and it decreases the equity by $650,000. Therefore, debit Depreciation expense – Plane by $650,000.
• Accumulated depreciation is a contra asset, and decreases the asset by $650,000. Therefore, credit Accumulated depreciation – Plane by $650,000.

b.

Prepare a journal entry to record the sale of the plane for cash at its book value as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash		200,000
	Accumulated Depreciation - Plane		650,000
	Plane			850,000
	(Recorded sale of plane.)

Table (2)

Working Note:

Compute the book value of the plane at the time of sale.

Computation of Book Value
Detail	Amount ($)
Cost of the Plane	850,000
Less: Accumulated depreciation	(650,000)
Book Value	200,000

Table (3)

• Cash is an asset, and it is increased by $200,000. Therefore, debit cash with $200,000.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation – Fixture by $650,000.
• Plane is an asset, and it is decreased by $850,000. Therefore, credit plane account by $850,000.

c.

Prepare a journal entry to record the sale of the plane for $215,000 cash as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash		215,000
	Accumulated Depreciation - Plane		650,000
	Plane			850,000
	Gain on Sale of Plane			15,000
	(Recorded gain on sale of plane.)

Table (4)

Working Note:

Compute the gain or loss on the sale of plane:

Computation of Gain or Loss on Sale of Plane
Details	Amount ($)	Amount ($)
Market value of the Asset		215,000
Less: Book value of the Asset disposed off
Cost of the Asset	850,000
Less: Accumulated depreciation	(650,000)	(200,000)
Gain on sale of Plane		15,000

Table (5)

• Cash is an asset, and it is increased by $215,000. Therefore, debit cash with $215,000.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation – Fixture by $650,000.
• Plane is an asset, and it is decreased by $850,000. Therefore, credit plane account by $850,000.
• Gain on sale of plane is revenue and increased by $15,000. Therefore, credit the gain on sale of plane with $15,000

d.

Prepare a journal entry to record the sale of the plane for $195,000 cash as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash		195,000
	Accumulated Depreciation - Plane		650,000
	Loss on Sale of Plane		5,000
	Plane			850,000
	(Recorded loss on sale of plane.)

Table (6)

Working Note:

Compute the gain or loss on the sale of plane:

Computation of Gain or Loss on Sale of Plane
Details	Amount ($)	Amount ($)
Market value of the Asset		195,000
Less: Book value of the Asset disposed off
Cost of the Asset	850,000
Less: Accumulated depreciation	(650,000)	(200,000)
Loss on sale of Plane		(5,000)

Table (7)

• Cash is an asset, and it is increased by $195,000. Therefore, debit cash with $195,000.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation – Fixture by $650,000.
• Plane is an asset, and it is decreased by $850,000. Therefore, credit plane account by $850,000.
• Loss on sale of plane is loss and increased by $5,000. Therefore, debit the loss on sale of plane with $5,000

e.

Prepare a journal entry to record the destruction of the Plane and insurance settlement as follows:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Insurance Settlement Receivable		190,000
	Accumulated Depreciation - Plane		650,000
	Loss on Sale of Plane		10,000
	Plane			850,000
	(Recorded loss on destruction of plane.)

Table (8)

Working Note:

Compute the gain or loss on the sale of plane:

Computation of Gain or Loss on Sale of Plane
Details	Amount ($)	Amount ($)
Insurance Settlement		190,000
Less: Book value of the Asset disposed off
Cost of the Asset	850,000
Less: Accumulated depreciation	(650,000)	(200,000)
Gain or (Loss)		(10,000)

Table (9)

• Insurance settlement receivable is an asset, and it is increased by $190,000. Therefore, debit it with $190,000.
• Accumulated depreciation is a contra asset, and cancellation of contra account increases the asset. Therefore, debit Accumulated depreciation – Fixture by $650,000.
• Plane is an asset, and it is decreased by $850,000. Therefore, credit plane account by $850,000.
• Loss on sale of plane is loss and increased by $10,000. Therefore, debit the loss on sale of plane with $10,000