During the current year, Hitchcock Developers disposed of plant assets in the following transactions.Feb. 10 office equipment costing $24,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to $21,800.Apr. 1 Hitchcock sold land and building to Claypool Associates for $900,000, receiving $100,000 cash and 5 years, 9 percent note receivables for the remaining balance. Hitchcock’s records showed the following amount: Land, $50,000; building, $550,000; accumulated depreciation: building (at the date of disposal), $250,000Aug. 15 Hitchcock traded in an old truck for a new one. The old truck had cost $26,000, and its accumulated depreciation amounted to $18,000. The list price the new truck was $39,000, but Hitchcock received a $10,000 trade in allowance for the old truck and paid $28,000 in cash. Hitchcock includes trucks in its Vehicles account.Oct. 1 Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computer’s list price was $8,000. Hitchcock accepted a trade in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a 1 year, 8 percent note payable for the $6,000 balance owed.Prepare journal entries to record each of the disposal transactions. Assume that depreciation expense on each asset has been recorded up to the date of disposal. Thus, you need not update the accumulated depreciation figures stated in the problem.Will the gains and losses recorded in part a affect the gross profit reported in Hitchcock’s income statement? Explain.Explain how the financial reporting of gain and losses plant assets differs from the financial reporting of unrealized gains and losses on marketable securities.

Question
Asked Jul 26, 2019

During the current year, Hitchcock Developers disposed of plant assets in the following transactions.

Feb. 10 office equipment costing $24,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to $21,800.

Apr. 1 Hitchcock sold land and building to Claypool Associates for $900,000, receiving $100,000 cash and 5 years, 9 percent note receivables for the remaining balance. Hitchcock’s records showed the following amount: Land, $50,000; building, $550,000; accumulated depreciation: building (at the date of disposal), $250,000

Aug. 15 Hitchcock traded in an old truck for a new one. The old truck had cost $26,000, and its accumulated depreciation amounted to $18,000. The list price the new truck was $39,000, but Hitchcock received a $10,000 trade in allowance for the old truck and paid $28,000 in cash. Hitchcock includes trucks in its Vehicles account.

Oct. 1 Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computer’s list price was $8,000. Hitchcock accepted a trade in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a 1 year, 8 percent note payable for the $6,000 balance owed.

  1. Prepare journal entries to record each of the disposal transactions. Assume that depreciation expense on each asset has been recorded up to the date of disposal. Thus, you need not update the accumulated depreciation figures stated in the problem.
  2. Will the gains and losses recorded in part a affect the gross profit reported in Hitchcock’s income statement? Explain.
  3. Explain how the financial reporting of gain and losses plant assets differs from the financial reporting of unrealized gains and losses on marketable securities.

 

check_circleExpert Solution
Step 1

Disposal of asset:

 

Disposal of asset is a non-recurring transaction, which record the sale of asset. Disposal may be due to obsolescence or wear and tear due to its use. Disposal of asset can be occur at residual value or in exchange of new asset.

Step 2

1.

Loss on disposal of office equipment is a loss for the company on disposal of asset and accumulated depreciation is a contra asset account so debit these two accounts. Office equipment is an asset and is disposed of, so assets are credited when decreases.

 

Working note:

 

Calculation of loss:

 

Journal entry to record disposal of office equipment
Post Debit
(S)
Credit
Date
Accounts and explanation
(S)
ref.
Feb. 10 Loss on disposal of office equipment
Accumulated
|equipment
Office equipment
|(To record the disposal of office
lequipтеnt)
2200
depreciation-office
21800
24000
Loss Cost-Accumulated depreciation -Sale price
=$24,000-$21, 800-0
$2,200
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Journal entry to record disposal of office equipment Post Debit (S) Credit Date Accounts and explanation (S) ref. Feb. 10 Loss on disposal of office equipment Accumulated |equipment Office equipment |(To record the disposal of office lequipтеnt) 2200 depreciation-office 21800 24000 Loss Cost-Accumulated depreciation -Sale price =$24,000-$21, 800-0 $2,200

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Step 3

Journal entry to record disposal of building:

Cash and note receivable is an asset and assets are debited when increased, accumulated depreciation is contra asset account so it will be debited at the time of sale of asset. Land and building account is credited as these two assets are being disposed of. Profit on sale of asset is gain for the business, thus it is credited.

 

Journal entry to record dispos...

Post Debit
(S)
Credit
Accounts and explanation
Date
(S)
ref.
Cash
Note receivable
Accumulated depreciation-Building
Apr. 1
100000
800000
250000
Land
50000
Building
Profit on sale of land & building
550000
550000
(To record the sale of land and building)
Post Debit
Credit
Accounts and explanation
Date
(S)
39000
(S)
ref.
Aug. 15
Vehicle a/c (new truck)
Accumulated depreciation-Old truck
Loss on disposal of old vehicle
Vehicle a/c (old truck)
18000
7000
26000
Cash a/c
28000
Discount and allowance received a/c
(To record the trade of old truck for a
10000
new one)
help_outline

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Post Debit (S) Credit Accounts and explanation Date (S) ref. Cash Note receivable Accumulated depreciation-Building Apr. 1 100000 800000 250000 Land 50000 Building Profit on sale of land & building 550000 550000 (To record the sale of land and building) Post Debit Credit Accounts and explanation Date (S) 39000 (S) ref. Aug. 15 Vehicle a/c (new truck) Accumulated depreciation-Old truck Loss on disposal of old vehicle Vehicle a/c (old truck) 18000 7000 26000 Cash a/c 28000 Discount and allowance received a/c (To record the trade of old truck for a 10000 new one)

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