Disposal of Fixed Asset

Perfect Auto Rentals sold one of its cars on January 1, 2019. Perfect had acquired the car on January 1, 2017, for $23,400. At acquisition Perfect assumed that the car would have an estimated life of 3 years and a residual value of $3,000. Assume that Perfect has recorded straight-line depreciation expense for 2017 and 2018.

Required:

1. Prepare the journal entry to record the sale of the car assuming the car sold for (a) $9,800 cash. (b) $7,500 cash, and (c) $11,500 cash.

2. How should the gain or loss on the disposition (if any) be reported on the income statement?

Concept Introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is the straight-line method. In this method, every year until the useful life of the asset, an equal amount of assets cost to depreciation expense is allocated.

Disposal of fixed assets:

Fixed assets are disposed of by a company either voluntarily or involuntarily. Voluntary disposal occurs when the useful life of the asset is over or due to technological obsolescence. An involuntary disposal occurs due to damage from fire, theft or natural calamities.

To Prepare:

Journal entry to record the sale of the car assuming the car is sold for (a) $9800 cash,

(b) $7500 cash and (c) $11500 cash.

First, we have to determine the depreciation expense for 2019 and to calculate the expense let’s use the following formula:

Straight line depreciation = (cost − residual value) / expected useful life

  = (23400 − 3000) / 3 = 6800

The next step would be to determine the gain or loss on the sale of the car.

The accumulated depreciation for year 2017 and 2018 would be:

Accumulated depreciation = Accumulated depreciation = Depreciation expense×2

Accumulated depreciation = $6,800×2

Accumulated depreciation = $13600

Book value (on 1^st January 2019) = Cost − Accumulated depreciation

Book value = $23,400 - $13,600

Book value = $9,800

1. Sale of car for $9800:

Particulars	$
Book value of car	9,800
Selling price of car	9,800

Now, Book value = Selling price

Thus, the company experienced no loss no gain on sale of car

Concept Introduction:

Disposal of fixed assets:

Fixed assets are disposed of by a company either voluntarily or involuntarily. Voluntary disposal occurs when the useful life of the asset is over or due to technological obsolescence. An involuntary disposal occurs due to damage from fire, theft or natural calamities.

Income Statement:

A company’s income statement shows the revenues, expenses and profit/loss earned over a period of time. It is one of the three important financial statements prepared by the company.

To explain:

The reporting of gain or loss on the disposition on the income statement.