Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.RequirementsWhen a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?How would an organization prevent the kind of fraud depicted here?

Question
Asked Jan 8, 2020
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Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

  1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?
  2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?
  3. How would an organization prevent the kind of fraud depicted here?
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Expert Answer

Step 1
  1. State whether a gain or loss is recognized when sale of a fully depreciated asset as shown below:

 

A fully depreciated asset has a zero carrying value in books of account. The asset total value is recorded as depreciation expense over useful life of the asset, making the asset value zero at end its useful life. So, the amount realized on sale of fully depreciated asset is treated as, “gain on sale of asset”.

Step 2
  1. State the determination of residual value for various assets as show below:

 

Residual value of an asset is determined by estimating a realized value for an asset at the end its useful lif...

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