Question

Refer to the balance sheet data in QS 12-5 from Anders Company. During 2017, a building with a book value of \(70,000 and an original cost of \)300,000 was sold at a gain of $60,000.

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

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

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

Short answer

1. The cash received on the sale of the building is computed as $130,000
2. Depreciation expense is computed as $45,000
3. The cost of the new building purchased is computed as $280,000.

Step-by-step solution

Meaning of Depreciation

Depreciation is a non-cash expense charged to the business entity's profit and loss statement because of the decline in the value of the fixed assets.

Computation of cash received on sale of Building

$\begin{array}{rcl}\mathbf{Cash}\mathbf{}\mathbf{received}\mathbf{}\mathbf{on}\mathbf{}\mathbf{sale}\mathbf{}\mathbf{of}\mathbf{}\mathbf{building}& \mathbf{=}& \mathbf{Net}\mathbf{}\mathbf{Book}\mathbf{}\mathbf{Value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Building}\mathbf{+}\mathbf{Gain}\mathbf{}\mathbf{on}\mathbf{}\mathbf{sale}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Building}\\ & \mathbf{=}& \mathbf{70}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{60}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{130}\mathbf{,}\mathbf{000}\end{array}$

Computation of depreciation expense recorded on Equipment for 2017

$\begin{array}{rcl}\mathbf{Depreciation}\mathbf{}\mathbf{Expense}& \mathbf{=}& \mathbf{Ending}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{accumulated}\mathbf{}\mathbf{depreciation}\mathbf{+}\mathbf{Original}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{building}\\ & & \mathbf{-}\mathbf{Net}\mathbf{}\mathbf{book}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{building}\mathbf{}\mathbf{sold}\mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{of}\mathbf{}\mathbf{accumulated}\mathbf{}\mathbf{depreciation}\\ & \mathbf{=}& \mathbf{100}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{300}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{70}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{285}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}\end{array}$

Working note:

Dr.

Accumulated Depreciation

Cr.

		Bal., Dec 31,2016	$285,000
Sale	$230,000	Depreciation expense (Bal)	$45,000
		Bal., Dec 31,2017	$100,000

Computation of cost of new building purchased

$\begin{array}{rcl}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{new}\mathbf{}\mathbf{building}\mathbf{}\mathbf{purchased}& \mathbf{=}& \mathbf{Original}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{building}\mathbf{}\mathbf{sold}\mathbf{+}\mathbf{Ending}\mathbf{}\mathbf{gross}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{building}\\ & & \mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{gross}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Building}\\ & \mathbf{=}& \mathbf{300}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{380}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{400}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{280}\mathbf{,}\mathbf{000}\end{array}$

Working note:

Dr.

Building

Cr.

Bal., Dec 31,2016	$400,000
Purchase	$280,000	Sale	$300,000
Bal., Dec 31,2017	$380,000