Question

The plant assets section of the comparative balance sheets of Anders Company is reported below.

ANDERS COMPANY

Comparative Balance Sheets

2017 2016

Plant assets

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . \( 180,000 \)270,000

Accum. depr.—Equipment . . . . . . . . . . . . . (100,000) (210,000)

Equipment, net . . . . . . . . . . . . . . . . . . . . . . \( 80,000 \) 60,000

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 380,000 \)400,000

Accum. depr.—Buildings . . . . . . . . . . . . . . . (100,000) (285,000)

Buildings, net . . . . . . . . . . . . . . . . . . . . . . . \( 280,000 \)115,000

Refer to the balance sheet data above from Anders Company. During 2017, equipment with a book value of \(40,000 and an original cost of \)210,000 was sold at a loss of $3,000.

1. How much cash did Anders receive from the sale of equipment?

2. How much depreciation expense was recorded on equipment during 2017?

3. What was the cost of new equipment purchased by Anders during 2017?

Short answer

1. The cash received on the sale of equipment is computed as $37,000,
2. Depreciation expense is computed as $60,000
3. The cost of new equipment purchased is computed as $120,000.

Step-by-step solution

Meaning of Depreciation

Depreciation refers to the decline in the value of the fixed assets and is charged to the business entity's profit and loss statement.

Computation of cash received on sale of equipment

$\begin{array}{rcl}\mathbf{Cash}\mathbf{}\mathbf{received}\mathbf{}\mathbf{on}\mathbf{}\mathbf{sale}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}& \mathbf{=}& \mathbf{Net}\mathbf{}\mathbf{Book}\mathbf{}\mathbf{Value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Equipment}\mathbf{-}\mathbf{Loss}\mathbf{}\mathbf{on}\mathbf{}\mathbf{sale}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Equipment}\\ & \mathbf{=}& \mathbf{40}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{3}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{000}\end{array}$

Computation of depreciation expense recorded on Equipment for 2017

$\begin{array}{rcl}\mathbf{Depiciation}\mathbf{}\mathbf{Expense}& \mathbf{=}& \mathbf{Ending}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{accumulated}\mathbf{}\mathbf{depriciation}\mathbf{+}\mathbf{Original}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}\\ & & \mathbf{-}\mathbf{Net}\mathbf{}\mathbf{book}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}\mathbf{}\mathbf{sold}\mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{accumulated}\mathbf{}\mathbf{depriciation}\\ & \mathbf{=}& \mathbf{100}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{210}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{210}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\end{array}$

Working note:

Dr.

Accumulated Depreciation

Cr.

		Bal., Dec 31,2016	$210,000
Sale	$170,000	Depreciation expense (Bal)	$60,000
		Bal., Dec 31,2017	$100,000

Computation of cost of new equipment purchased

$\begin{array}{rcl}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{new}\mathbf{}\mathbf{equipment}\mathbf{}\mathbf{purchased}& \mathbf{=}& \mathbf{Original}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{euipment}\mathbf{}\mathbf{sold}\mathbf{+}\mathbf{Ending}\mathbf{}\mathbf{gross}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}\\ & & \mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{Gross}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}\\ & \mathbf{=}& \mathbf{210}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{180}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{270}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{}\end{array}$

Working note:

Dr.

Equipment

Cr.

Bal., Dec 31,2016	$270,000
Purchase	$120,000	Sale	$210,000
Bal., Dec 31,2017	$180,000