Question

(Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.

Schedule of Property Dispositions
	Cost	Accumulated Depreciation	Cash Proceeds	Fair Value	Nature of Disposition
Land	\(40,000	—	\)31,000	\(31,000	Condemnation
Building	15,000	—	3,600	—	Demolition
Warehouse	70,000	\)16,000	74,000	74,000	Destruction by fire
Machine	8,000	2,800	900	7,200	Trade-in
Furniture	10,000	7,850	—	3,100	Contribution
Automobile	9,000	3,460	2,960	2,960	Sale

The following additional information is available.

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased for \(35,000.

Building: On April 2, land and building were purchased at a total cost of \)75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated \(16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of \)90,000.

Machine: On December 26, the machine was exchanged for another machine having a fair value of \(6,300 and cash of \)900 was received. (The exchange lacks commercial substance.)

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

Instructions

Indicate how these items would be reported on the income statement of Hollerith Co.

Short answer

1. Loss on Land condemnation = $9,000
2. Found no acknowledged benefit or loss for buildings.
3. Realized gain on warehouse = $20,000
4. The total gain deferred is $1,750
5. Gain on dispose of furniture $950
6. Loss on sale of car = $2,580

Step-by-step solution

Meaning of Depreciation

Depreciation is an expense incurred on an asset that has become obsolete due to erosion and abrasion.An asset can be depreciated in various ways that help bring the exact value of the asset at the time of sale.

(a) Reporting treatment of land on the income statement

The $9,000 loss on land condemnation ($40,000 – $31,000) should be included as a unique and irregular item on the income statement. The $35,000 land acquisition has no impact on the income statement.

Working notes:

Calculation of Land condemnation

$\begin{array}{rcl}\mathit{L}\mathit{a}\mathit{n}\mathit{d}\mathbf{}\mathit{c}\mathit{o}\mathit{n}\mathit{d}\mathit{e}\mathit{m}\mathit{n}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{l}\mathit{a}\mathit{n}\mathit{d}\mathbf{-}\mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{c}\mathit{e}\mathit{e}\mathit{d}\mathit{s}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\\ & & \end{array}$

(b) Reporting treatment of building on the income statement

On the destruction of the structure, there is no acknowledged benefit or loss. The full purchase price ($15,000) is given to the land, reduced by the demolition revenues ($3,600).

(c) Reporting treatment of warehouse on the income statement

The profit from the warehouse's destruction should be reported as an uncommon and occasional item. The profit is calculated as follows:

Insurance proceeds	$74,000
Deduct: Cost$70,000
Less: Accumulated depreciation16,000	54,000
Realized gain	$20,000

Some argue that when the proceeds are reinvested in similar assets, a portion of the gain should be delayed. Such an approach, we feel, should not be authorized. GAAP does not allow the gain to be deferred in this circumstance.

(d) Reporting treatment of Machine on the income statement

The recognized gain on the transaction would be computed as follows:

The fair value of an old machine	$7,200
Deduct: Book value of old machine
Cost$8,000
Less: Accumulated depreciation2,800	5,200
Total gain	$2,000

Working notes:

Calculation of total gain recognized

$\begin{array}{rcl}\mathit{T}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{g}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}& \mathbf{=}& \mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{c}\mathit{c}\mathit{u}\mathit{r}\mathit{e}\mathit{d}\mathbf{\times }\frac{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}}{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{+}\mathbf{F}\mathbf{a}\mathbf{i}\mathbf{r}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{\$}\mathbf{900}}{\mathbf{\$}\mathbf{900}\mathbf{+}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{300}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{250}\\ & & \end{array}$

Calculation of gain deferred.

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{d}\mathit{e}\mathit{f}\mathit{e}\mathit{r}\mathit{r}\mathit{e}\mathit{d}& \mathbf{=}& \mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{-}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{250}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{750}\\ & & \end{array}$

Most likely, this profit would need to be included in other revenues and profits. If the firm considers that such a circumstance is seldom and important, it may be recorded as a unique item. The new machine's cost would be capitalized at $4,550.

The fair value of a new machine	$6,300
Less: Gain deferred	1,750
Cost of a new machine	$4,550

(e) Reporting treatment of furniture on the income statement

The furniture donation would be recorded as a $3,100 contribution expenditure with a $950 gain on furniture disposal.If desired, the firm can net the contribution expenditure and corresponding gain.

Working notes:

Calculation of gain on disposing of furniture

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{ }\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{f}\mathit{u}\mathit{r}\mathit{n}\mathit{i}\mathit{t}\mathit{u}\mathit{r}\mathit{e}& \mathbf{=}& \mathit{F}\mathit{u}\mathit{r}\mathit{n}\mathit{i}\mathit{t}\mathit{u}\mathit{r}\mathit{e}\mathbf{}\mathit{d}\mathit{o}\mathit{n}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{-}\left(Cost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{100}\mathbf{-}\left(\$10,000-\$7,850\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{950}\\ & & \end{array}$

(f) Reporting treatment of Automobiles on the income statement

The $2,580 loss on the car sale should presumably be stated in the other costs or losses section.

Working notes:

Calculating loss on sale of the car

$\begin{array}{rcl}\mathit{L}\mathit{o}\mathit{s}\mathit{s}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{c}\mathit{a}\mathit{r}& \mathbf{=}& \mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{c}\mathit{e}\mathit{e}\mathit{d}\mathit{s}\mathbf{-}\left(Cost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{960}\mathbf{-}\left(\$9,000-\$3,460\right)\\ & \mathbf{=}& \left(\$2,580\right)\\ & & \end{array}$

Note: Here, the bracket denotes the negative balance