Chapter 9, Problem 9E

Demonstrating the Effect of Book Value on Reporting an Asset Disposal

FedEx Corporation is the world’s leading express-distribution company. In addition to the world’s largest fleet of all-cargo aircraft, the company has more than 54,000 ground vehicles that pick up and deliver packages. Assume that FedEx sold a delivery truck for $16.000. FedEx had originally purchased the truck for $28,000 and had recorded depreciation for three years.

Required:

1. 1. Calculate the amount of gain or loss on disposal, assuming that Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $15.000.
2. 2. Using the following structure, indicate the effects (accounts, amounts, and + or −) for the disposal of the truck, assuming that Accumulated Depreciation was (a) $12.000, (b) $10,000, and (c) $15,000.

  

1. 3. Based on the three preceding situations, explain how the amount of depreciation recorded up to the time of disposal affects the amount of gain or loss on disposal.
2. 4. Prepare the journal entry to record the disposal of the truck, assuming that Accumulated Depreciation was (a) $12,000, (b) $10.000, and (c) $15,000.

To determine

To calculate: The amount of gain or loss on disposal, assuming that the Accumulated depreciation was a) $12,000, b) $10,000, and c) $15,000.

Answer to Problem 9E

Calculate the amount of gain or loss on disposal of Equipment.

$\text{Gain or loss on disposal}\text{=}\text{Sale}\text{proceed}\text{-}\text{Book}\text{value}\text{of}\text{the}\text{truck}$

a) Assuming the accumulated depreciation is $12,000.

Book value of the Equipment is calculated as follows:

$\begin{array}{c}\text{Book value of the truck= Cost of acquisition – Accumulated Depreciation}\\ \text{=}\text{\$28,000}\text{-}\text{\$12,000}\\ \text{=}\text{\$16,000}\end{array}$

Hence, Book value of the Equipment is $16,000.

Gain or loss on disposal of Equipment is as follows:

$\begin{array}{c}\text{Gain or loss on disposal}\text{=}\text{Sale}\text{proceed}\text{-}\text{Book}\text{value}\text{of}\text{the}\text{truck}\\ \text{=}\text{\$16,000}\text{-}\text{\$16,000}\\ \text{=}\text{\$0}\end{array}$

Therefore, there is no gain and no loss at assumed accumulated depreciation of $12,000.

b)Assuming the accumulated depreciation is $10,000.

Book value of the Equipment is calculated as follows:

$\begin{array}{c}\text{Book value of the truck= Cost of acquisition – Accumulated Depreciation}\\ \text{=}\text{\$28,000}\text{-}\text{\$10,000}\\ \text{=}\text{\$18,000}\end{array}$

Hence, Book value of the Equipmentis $18,000.

Gain or loss on disposal of Equipment is as follows:

$\begin{array}{c}\text{Gain or loss on disposal}\text{=}\text{Sale}\text{proceed}\text{-}\text{Book}\text{value}\text{of}\text{the}\text{truck}\\ \text{=}\text{\$16,000}\text{-}\text{\$18,000}\\ \text{=}\left(\text{\$2,000}\right)\end{array}$

Therefore, there is $2,000 loss on disposal of Equipment at assumed accumulated depreciation of $10,000.

c) Assuming the accumulated depreciation is $15,000.

Book value of the Equipment is calculated as follows:

$\begin{array}{c}\text{Book value of the truck= Cost of acquisition – Accumulated Depreciation}\\ \text{=}\text{\$28,000}\text{-}\text{\$15,000}\\ \text{=}\text{\$13,000}\end{array}$

Hence, Book value of the Equipmentis $13,000.

Gain or loss on disposal of Equipment is as follows:

$\begin{array}{c}\text{Gain or loss on disposal}\text{=}\text{Sale}\text{proceed}\text{-}\text{Book}\text{value}\text{of}\text{the}\text{truck}\\ \text{=}\text{\$16,000}\text{-}\text{\$13,000}\\ \text{=}\$3,000\end{array}$

Therefore, there is $3,000 gain on disposal of Equipment at assumed accumulated depreciation of $15,000.

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, it is referred as disposal with no gain no loss.
• Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation on equipment).
• Disposal with loss: When the asset is disposed for less than its book value of the equipment.

1. a) At assumed accumulated depreciation of $12,000, there is neither gain nor loss on disposal of Equipment.
2. b) At assumed accumulated depreciation of $10,000, there is $2,000 loss on disposal of Equipment.
3. c) At assumed accumulated depreciation of $15,000, there is $3,000 gain on disposal of Equipment.

To determine

To indicate: the effects (accounts, amounts. and + or -) for the disposal of the Equipment, assuming that Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.

Explanation of Solution

Indicate the effects (accounts, amounts. and + or -) for the disposal of the Equipment, assuming that Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.

	Assets		=	Liabilities		+	Stockholders’ Equity
a.	Cash	+16000
	Equipment	–28,000
	Accumulated Depreciation (− A)	+ 12000
b.	Cash	+ 16000					Loss on Disposal (+E)	-2000
	Equipment	–28,000
	Accumulated Depreciation (− A)	+ 10000
c.	Cash	+ 16000					Gain on Disposal (+R)	+ 3000
	Equipment	–28,000
	Accumulated Depreciation (− A)	+ 15000

Table (1)

Explanation:

1. a. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $12,000.
2. b. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $10,000. Loss on disposal of Equipment decreases the retained earnings by $2,000.
3. c. Disposal of Equipment increases the cash balance by $16,000. Book value of the Equipment is decreased by $28,000. Accumulated depreciation is increased by $15,000. Gain on disposal of Equipment increases the retained earnings by $3,000.

To determine

To explain: the amount of depreciation recorded up to the time of disposal affects the amount of gain or loss on disposal.

Explanation of Solution

By comparing situationsfrom a, b andc above, the gain or loss reported on disposal is directly affected by the book value of the asset. The book value of the asset is affected by the amount of depreciation recorded before the disposal.

The higher the amount of depreciation recorded before a disposal, the more possibility that the asset will generate a gain on disposal (situation c).

The lesser the amount of depreciation recorded before a disposal, the more possibility that the asset will generate a loss on disposal (situation b).

To determine

To prepare: the journal entries to record the disposal of the Equipment, assuming that the accumulated depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.

Answer to Problem 9E

Prepare the journal entries to record the disposal of the Equipment, assuming that the accumulated depreciation was (a) $12,000, (b) $10,000, and (c) $ 15,000.

1. (a) Assuming that the accumulated depreciation was $12,000.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		16,000
	Accumulated depreciation- Equipment		12,000
	Equipment			28,000
	(To record the disposal of the Equipment)

Table (1)

1. (b) Assuming that the accumulated depreciation was $10,000.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		16,000
	Accumulated depreciation- Equipment		10,000
	Loss on disposal of Equipment		2,000
	Equipment			28,000
	(To record the disposal of the Equipment)

Table (2)

1. (c) Assuming that the accumulated depreciation was $15,000.

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		16,000
	Accumulated depreciation- Equipment		15,000
	Equipment			28,000
	Gain on disposal of Equipment			3,000
	(To record the disposal of the Equipment)

Table (3)

Explanation of Solution

a) Assuming that the accumulated depreciation was $12,000.

• Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
• Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $12,000.
• Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.

b) Assuming that the accumulated depreciation was $10,000.

• Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
• Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $10,000.
• Loss on disposal of Equipment is an element of retained earnings. Loss decreases the retained earnings. Thus, loss on disposal of Equipment is debited with $2,000.
• Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.

c) Assuming that the accumulated depreciation was $15,000.

• Cash is an asset. Sale of Equipment increases the cash balance. Thus, cash is debited with $16,000.
• Accumulated depreciation is a contra asset. It decreases the assets value. Thus, accumulated depreciation is debited with $15,000.
• Equipment is an asset. Sale of Equipment decreases the Equipment value. Thus, Equipment is credited with $28,000.
• Gain on disposal of Equipment is an element of retained earnings. Gain increases the retained earnings. Thus, gain on disposal of Equipment is credited with $3,000.