Chapter 9, Problem 9.2AP

(a)

To determine

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.

To journalize: the transactions of the plant assets for the year 2018.

Explanation of Solution

Journalize the transactions of the plant assets.

Date	Particulars	Post Ref.	Debit ($)	Credit ($)
April 1	Land		2,200,000
	Cash			2,200,000
	(To record the purchase of land for cash.)
May 1	Depreciation Expense (1)		20,000
	Accumulated Depreciation-Equipment			20,000
	(To record the depreciation expense for equipment.)
May 1	Accumulated Depreciation-Equipment (2)		440,000
	Cash		170,000
	Equipment			600,000
	Gain on disposal of plant assets (3)			10,000
	(To record the sale for equipment.)
June 1	Cash		1,600,000
	Land			1,000,000
	Gain on disposal of plant assets			600,000
	(To record the sale of land.)
July 1	Equipment		1,100,000
	Cash			1,100,100
	(To record the purchase of equipment.)
December 31	Depreciation Expense (4)		70,000
	Accumulated Depreciation-Equipment			70,000
	(To record the depreciation expense for equipment.)
December 31	Accumulated Depreciation-Equipment (5)		700,000
	Equipment			700,000
	(To record the retirement of equipment.)

Table (1)

Working notes:

Determine the amount of depreciation for equipment.

Cost of the equipment =$600,000

Useful life= 10 years

Number of months used in 2018 = 4 months (January 1, 2018-April 30, 2018)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$600,000}{10}\times \frac{4}{12}\\ =\$20,000\end{array}$ (1)

Calculate the amount of accumulated depreciation for equipment.

Cost of the equipment =$600,000

Useful life= 10 years

Number of years used= 7 years (January 1, 2011-December 31, 2017)

Number of months used in 2018 = 4 months (January 1, 2018-April 30, 2018)

$\begin{array}{c}\text{Accumulated depreciation }=\left[\begin{array}{l}\text{Cost}\times \frac{\text{Number of years used}}{\text{Useful life}}\\ \text{+Current year depreciation}\end{array}\right]\\ =\$600,000\times \frac{7}{10}+\$20,000\left(1\right)\\ =\$440,000\end{array}$ (2)

Determine the amount of gain / (loss) on disposal of equipment.

$\begin{array}{c}\text{Gain/loss on disposal of asset = Sale}\text{proceeds}-\text{Book}\text{value}\\ \text{=Cash}\text{received}-\left(\begin{array}{l}\text{Equiment – }\\ \text{Accumulated Depreciation }\end{array}\right)\\ \text{= \$170,000}-\left(\text{\$600,000– \$440,000}\left(2\right)\right)\\ =\$170,000-\$160,000\\ \text{= \$10,000}\end{array}$ (3)

Determine the amount of depreciation for equipment that is retired on December 31, 2018.

Cost of the equipment =$700,000

Useful life= 10 years

Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$700,000}{10}\times \frac{12}{12}\\ =\$70,000\end{array}$ (4)

Calculate the amount of accumulated depreciation for equipment retired on December 31, 2018.

Cost of the equipment =$700,000

Useful life= 10 years

Number of years used= 10 years (January 1, 2008-December 31, 2018)

$\begin{array}{c}\text{Accumulated depreciation }=\left[\text{Cost}\times \frac{\text{Number of years used}}{\text{Useful life}}\right]\\ =\$700,000\times \frac{10}{10}\\ =\$700,000\end{array}$ (5)

Determine the book value of the equipment retired.

$\begin{array}{c}\text{Book}\text{value}\text{=Equiment – Accumulated Depreciation}\\ \text{= \$700,000}-\$700,000\\ \text{= \$0}\end{array}$ (6)

Note 1:

Since there is no salvage value, the book value of the equipment is zero. Thus, for recording the retirement of the equipment, the journal entry for charging the accumulated depreciation on the equipment is reversed.

Explanation:

Transaction 1: Purchase of land on April 1, 2018.

• Land is an asset and is increased by $2,200,000 due to purchase of land. Therefore, Land account is debited with $2,200,000.
• Cash is an asset and is decreased by $2,200,000 due to the amount paid on purchase of equipment. Therefore, Cash account is credited with $2,200,000.

Transaction 2: Record of depreciation expense on May 1, 2018.

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $20,000. Therefore, Depreciation expense – Equipment is debited with $20,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $20,000 that decreases the value of assets by $20,000. Therefore, the Accumulated depreciation-Equipment account is credited with $20,000.

Transaction 3: Sale of equipment on May 1, 2018.

• Accumulated depreciation-Equipment is a contra asset with a normal credit balance. Its decreased value increases the value of the asset by $440,000. Therefore, Accumulated depreciation-Equipment account is debited with $440,000.
• Cash is an asset and increased by $170,000 due to sale of equipment. Therefore, Cash account is debited with $170,000.
• Equipment is an asset and decreased due to sale of equipment by $600,000. Therefore, Equipment account is credited with $600,000.
• Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $10,000. Therefore, the gain on disposal of plant assets account is credited with $10,000.

Transaction 4: Sale of land on June 1, 2018.

• Cash is an asset and increased by $1,600,000 due to sale of equipment. Therefore, Cash account is debited with $1,600,000.
• Land is an asset and decreased due to sale of land by $1,000,000. Therefore, Land account is credited with $1,000,000.
• Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $600,000. Therefore, the gain on disposal of plant assets account is credited with $600,000.

Transaction 4: Purchase of equipment on July 1.

• Equipment is an asset and is increased by $1,100,000 due to purchase of land. Therefore, Land account is debited with $1,100,000.
• Cash is an asset and is decreased by $1,100,000 due to the amount paid on purchase of equipment. Therefore, Cash account is credited with $1,100,000.

Transaction 5: Record of depreciation for the retired equipment on December 31, 2018.

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $70,000. Therefore, Depreciation expense – Equipment is debited with $70,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $70,000 that decreases the value of assets by $70,000. Therefore, the Accumulated depreciation-Equipment account is credited with $70,000.

Transaction 6: Retirement of equipment on December 31, 2018.

• Accumulated depreciation-Equipment is a contra asset with a normal credit balance. Its decreased value increases the value of the asset by $700,000. Therefore, Accumulated depreciation-Equipment account is debited with $700,000.
• Equipment is an asset and decreased due to sale of equipment by $700,000. Therefore, Equipment account is credited with $700,000.

Note 2:

The T-accounts are recorded after the recording of the adjusting entries for depreciation for building and equipment.

(b)

To determine

Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.

To Record: The adjusting entries for depreciation for 2018.

Explanation of Solution

Journalize the adjusting entries.

Record the adjusting entry for depreciation for building during the year 2018:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2018	Depreciation Expense                  (7)		662,500
	Accumulated Depreciation - Buildings			662,500
	(To record the adjusting entry for depreciation for building.)

Table (2)

Working note:

Determine the amount of depreciation for building.

Cost of the buildings =$26,500,000

Useful life= 40 years

Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$26,500,000}{40}\times \frac{12}{12}\\ =\$662,500\end{array}$ (7)

Record the adjusting entry for depreciation for equipment during the year 2018:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2018	Depreciation Expense            (10)		3,925,000
	Accumulated Depreciation - Equipment			3,925,000
	(To record the adjusting entry for depreciation for equipment.)

Table (3)

Working notes:

Determine the total depreciation expense for equipment for 2018.

$\begin{array}{c}\text{Total}\text{Depreciation }=\left(\begin{array}{l}\text{Depreciation}\text{expense}\\ \text{for}\text{remaing}\text{cost}\\ \text{of}\text{equipment}\end{array}\right)+\left(\begin{array}{l}\text{Deperciation}\text{expense}\\ \text{for}\text{new}\text{equipment}\end{array}\right)\\ =\$3,870,000\left(8\right)+\$55,000\left(9\right)\\ =\$3,925,000\end{array}$ (10)

Determine the remaining cost of the equipment as on December 31, 2018.

Particulars	Amount ($)
Cost of the equipment as on January 1, 2018	40,000,000
Less: Sale of equipment on  May 1, 2018	(600,000)
Retired equipment on December 31, 2018	(700,000)
Remaining cost of the equipment	3,870,000

Table (4)

Determine the depreciation expense for the remaining cost of the equipment.

Remaining Cost of the equipment =$38,700,000(Refer Table 4)

Useful life= 10 years

Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$38,700,000}{10}\times \frac{12}{12}\\ =\$3,870,000\end{array}$ (8)

Determine the depreciation expense for the cost of the new equipment.

Cost of the new equipment purchased on July 1, 2018 =$1,100,000

Useful life= 10 years

Number of months used in 2018 = 6 months (July 1, 2018-December 31, 2018)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$1,100,000}{10}\times \frac{6}{12}\\ =\$55,000\end{array}$ (9)

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Post: The above adjusting entries to T-accounts.

Solution:

Post the above journal entries in part (a) and adjusting entries in part (b) into the T-accounts.

Land is an asset with a normal debit balance.

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2018	Beginning Balance	3,000,000		June 1, 2018	Cash	1,000,000
April 1, 2018	Cash	2,200,000		December 31,2018	Closing balance	4,200,000
December 31,2018	Total	5,200,000		December 31,2018	Total	5,200,000
January 1, 2019	Beginning Balance	4,200,000

Table (5)

Building is an asset with a normal debit balance.

Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2018	Beginning Balance	26,500,000		December 31,2018	Closing balance	26,500,000
December 31,2018	Total	26,500,000		December 31,2018	Total	26,500,000
January 1, 2019	Beginning Balance	26,500,000

Table (6)

Equipment is an asset with a normal debit balance.

Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2018	Beginning Balance	40,000,000		May 1, 2018	Cash	600,000
July 1, 2018	Cash	1,100,000		December 31, 2018	Accumulated Depreciation	700,000
				December 31,2018	Closing balance	39,800,000
December 31,2018	Total	39,800,000		December 31,2018	Total	39,800,000
January 1, 2019	Beginning Balance	39,800,000

Table (7)

Accumulated Depreciation-Buildings is a contra asset account with a normal credit balance.

Accumulated Depreciation-Buildings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31,2018	Closing Balance	12,587,500		January 1, 2018	Beginning Balance	11,925,000
				December 31,2018	Depreciation expense	662,500
December 31,2018	Total	12,587,500		December 31,2018	Total	12,587,500

Table (8)

Accumulated Depreciation-Equipment is a contra asset account with a normal credit balance.

Accumulated Depreciation-Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
May 1, 2018	Equipment	440,000		January 1, 2018	Beginning Balance	5,000,000
December 31, 2018	Equipment	700,000		May 1, 2018	Depreciation expense	20,000
December 31, 2018	Closing Balance	7,875,000		December 31, 2018	Depreciation expense	70,000
				December 31, 2018	Depreciation expense	3,925,000
December 31	Total	9,015,000		December 31	Total	9,015,000

Table (9)

(c)

To determine

To Prepare: the plant assets section of Company A’s balance sheet as on December 31, 2018.

Explanation of Solution

Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are reported by a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position.

Company A
Partial Balance Sheet
As of December 31, 2018
Assets	Amount ($)	Amount
		($)
Plant assets:
Land		4,200,000
Buildings	26,500,000
Less: Accumulated depreciation	(12,587,500)	13,912,500
Equipment	39,800,000
Less: Accumulated depreciation	(7,875,000)	31,925,000
Total plant assets		50,037,500

Table (10)

Note 3:

Refer the T-accounts for the balances of the plant assets.