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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Swann Company sold a delivery truck on April 1, 2019. Swann had acquired the truck on January 1, 2015, for $42,000. At acquisition, Swann had estimated that the truck would have an estimated life of 5 years and a residual value of $5,000. At December 31, 2018, the truck had a book value of $12,400.

Required:

  1. 1. Prepare any necessary journal entries to record the sale of the truck, assuming it sold for:
  2. a. $12,000
  3. b. $9,000
  4. 2. How should the gain or loss on disposal be reported on the income statement?
  5. 3. Assume that Swann uses IFRS and sold the truck for $12,000. In addition, Swann had previously recorded a revaluation surplus related to this machine of $4,000. What journal entries are required to record the sale?

1.

To determine

Prepare journal entries of company S for the given transaction.

Explanation

Disposal of Assets: Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

  • Disposal with no gain no loss: When the asset is disposed with no consideration received.
  • Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
  • Disposal with loss: When the asset is disposed for less than its book value.

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

  1. a.      Prepare journal entries to record the sale of truck for $12,000.
DateAccount Title & ExplanationDebit ($)Credit($)
April 1, 2019Depreciation expense (2)1,850 
     Accumulated depreciation-Truck1,850
 (To record the depreciation expense)

Table (1)

  • Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $1,850. Therefore, debit depreciation expense account with $1,850.
  • Accumulated depreciation is a contra asset, and it decreases the value of asset by $1,850. Therefore, credit accumulated depreciation account with $1,850.
DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
April 1, 2019Cash 12,000 
 Accumulated Depreciation –Truck (3) 31,450 
     Gain from sale of Truck (4)  1,450
     Truck   42,000
 (To record the gain from disposal of equipment)   

Table (2)

  • Cash is an asset, and it increases the value of assets by $12,000. Therefore, debit the cash account with $12,000.
  • Accumulated depreciation is a contra asset, and it increases the asset by $31,450. Therefore, debit Accumulated depreciation with $31,450.
  • Truck is an asset, and it decreases the value of assets by $42,000. Therefore, credit truck account by $42,000.
  • Gain from sale of truck is revenue of the company and it increases the value of equity by $1,450. Therefore, credit gain on sale of truck account with $1,450.

Working note (1):

Calculate the depreciation expenses:

Depreciation expenses=Acquisition costResidual valueEstimated life=$42,000$5,0005 years=$7,400 per year

Working note (2):

Calculate the depreciation expenses for the period December 31, 2018 to April 1, 2019:

Depreciation expenses=[Depreciationexpenses]×[Depreciation expenses incurred duringDecember 31, 2018 to April 1, 2019Number months in a year]=$7,400×3 months12=$1,850 per year

Working note (3):

Calculate the accumulated depreciation:

Accumulated Depreciation=[Acquisition costBook value]+[

2.

To determine

Describe the manner in which the gain or loss on disposal of the asset be reported on the income statement of company S.

3.

To determine

Prepare journal entries of company S for the sale of truck under IFRS method.

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