BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

Solutions

Chapter
Section
BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
26 views

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?

1.

To determine

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.

Explanation

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 1st 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 car9,800
      Selling price of car9,800

    Now, Book value = Selling price

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

2.

To determine

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.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

In what ways is economics a science?

Principles of Microeconomics (MindTap Course List)

Discuss the importance of data models.

Database Systems: Design, Implementation, & Management

Why is an object said to have greater semantic content than an entity?

Database Systems: Design, Implementation, & Management

What type of fixed gage can be used to check hole diameters?

Precision Machining Technology (MindTap Course List)

Identify and briefly define six characteristics that describe the quality of data.

Principles of Information Systems (MindTap Course List)

What is the difference between energy and power?

Engineering Fundamentals: An Introduction to Engineering (MindTap Course List)

Which type of stator winding has two windings in parallel? Wye Delta Trio Series

Automotive Technology: A Systems Approach (MindTap Course List)

Convert 10,000 ft-lbf of energy into BTU, Joules, and kilojoules.

Fundamentals of Chemical Engineering Thermodynamics (MindTap Course List)

Knowing that the resultant of the two forces is directed along AB, determine F2.

International Edition---engineering Mechanics: Statics, 4th Edition

What activities does a license agreement restrict? (163)

Enhanced Discovering Computers 2017 (Shelly Cashman Series) (MindTap Course List)