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Chapter 9: 14 RQ (page 488)

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation constitutes a loss?

Short Answer

Expert verified

The cash received or market value of the asset received is more or less than the book value of the asset then gain or loss will arise. Gain arise when market value exceeds book value and loss occur when market value is lower than book value.

Step by step solution

01

Determination of gain or loss when disposing of plant assets

When the assets owned by the company are disposed of, then the company determines the gain or loss by comparing the amount of cash received and the market value of any asset which is received in exchange for the book value of the asset sold.

02

Situations that constitute gain and loss

The gain will occur in the case when cash received by the company or the market value of the assets received is greater than the book value of the asset.

The loss will occur in the case when cash received by the company or the market value of the assets received is less than the book value of the asset.

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Most popular questions from this chapter

Maxim Company reported beginning and ending total assets of \(140,000 and \)160,000, respectively. Its net sales revenue for the year was $240,000. What was Maxim’s asset turnover ratio?

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a

Purchase price of three acres of land

$86,000

b

Delinquent real estate taxes on the land to be paid by safe parking

6,300

c

Additional dirt and earth removing

8,400

d

Title insurance and the land acquisition

3,400

e

Fence around the boundary of the property

9,600

f

Building permit for building

900

g

Architect’s fee for design of building

20,100

h

Signs near the front of property

9,000

i

Material used to construct the building

217,000

J

Labor to construct the building

172,000

k

Interest cost on construction loan for the building

9,500

l

Parking lots on the property

29,400

m

Lights for parking lots

11,600

n

Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)

80,000

o

Furniture

11,700

p

Transportation of furniture from seller to the building

1,900

q

Additional fencing

6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment.

Exchanging plant assets White Corporation purchased equipment for \(22,000. White recorded total depreciation of \)19,000 on the equipment. On January 1, 2018, White traded in the equipment for new equipment, paying \(23,200 cash. The fair market value of the new equipment is \)25,100. Journalize White Corporation’s exchange of equipment. Assume the exchange had commercial substance.
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