(a)
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.
To journalize: the transactions of the plant assets for the year 2018.
(a)
Explanation of Solution
Journalize the transactions of the plant assets.
Date | Particulars | Post Ref. | Debit ($) | Credit ($) |
April 1 | Land | 2,200,000 | ||
Cash | 2,200,000 | |||
(To record the purchase of land for cash.) | ||||
May 1 |
(1) | 20,000 | ||
Accumulated Depreciation-Equipment | 20,000 | |||
(To record the depreciation expense for equipment.) | ||||
May 1 |
Accumulated Depreciation-Equipment (2) | 440,000 | ||
Cash | 170,000 | |||
Equipment | 600,000 | |||
Gain on disposal of plant assets (3) | 10,000 | |||
(To record the sale for equipment.) | ||||
June 1 | Cash | 1,600,000 | ||
Land | 1,000,000 | |||
Gain on disposal of plant assets | 600,000 | |||
(To record the sale of land.) | ||||
July 1 | Equipment | 1,100,000 | ||
Cash | 1,100,100 | |||
(To record the purchase of equipment.) | ||||
December 31 |
Depreciation Expense (4) | 70,000 | ||
Accumulated Depreciation-Equipment | 70,000 | |||
(To record the depreciation expense for equipment.) | ||||
December 31 |
Accumulated Depreciation-Equipment (5) | 700,000 | ||
Equipment | 700,000 | |||
(To record the retirement of equipment.) |
Table (1)
Working notes:
Determine the amount of depreciation for equipment.
Cost of the equipment =$600,000
Useful life= 10 years
Number of months used in 2018 = 4 months (January 1, 2018-April 30, 2018)
Calculate the amount of accumulated depreciation for equipment.
Cost of the equipment =$600,000
Useful life= 10 years
Number of years used= 7 years (January 1, 2011-December 31, 2017)
Number of months used in 2018 = 4 months (January 1, 2018-April 30, 2018)
Determine the amount of gain / (loss) on disposal of equipment.
Determine the amount of depreciation for equipment that is retired on December 31, 2018.
Cost of the equipment =$700,000
Useful life= 10 years
Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)
Calculate the amount of accumulated depreciation for equipment retired on December 31, 2018.
Cost of the equipment =$700,000
Useful life= 10 years
Number of years used= 10 years (January 1, 2008-December 31, 2018)
Determine the book value of the equipment retired.
Note 1:
Since there is no salvage value, the book value of the equipment is zero. Thus, for recording the retirement of the equipment, the journal entry for charging the accumulated depreciation on the equipment is reversed.
Explanation:
Transaction 1: Purchase of land on April 1, 2018.
- Land is an asset and is increased by $2,200,000 due to purchase of land. Therefore, Land account is debited with $2,200,000.
- Cash is an asset and is decreased by $2,200,000 due to the amount paid on purchase of equipment. Therefore, Cash account is credited with $2,200,000.
Transaction 2: Record of depreciation expense on May 1, 2018.
- Depreciation expense is an expense, and it decreases the
stockholder’s equity by $20,000. Therefore, Depreciation expense – Equipment is debited with $20,000. - Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $20,000 that decreases the value of assets by $20,000. Therefore, the Accumulated depreciation-Equipment account is credited with $20,000.
Transaction 3: Sale of equipment on May 1, 2018.
- Accumulated depreciation-Equipment is a contra asset with a normal credit balance. Its decreased value increases the value of the asset by $440,000. Therefore, Accumulated depreciation-Equipment account is debited with $440,000.
- Cash is an asset and increased by $170,000 due to sale of equipment. Therefore, Cash account is debited with $170,000.
- Equipment is an asset and decreased due to sale of equipment by $600,000. Therefore, Equipment account is credited with $600,000.
- Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $10,000. Therefore, the gain on disposal of plant assets account is credited with $10,000.
Transaction 4: Sale of land on June 1, 2018.
- Cash is an asset and increased by $1,600,000 due to sale of equipment. Therefore, Cash account is debited with $1,600,000.
- Land is an asset and decreased due to sale of land by $1,000,000. Therefore, Land account is credited with $1,000,000.
- Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $600,000. Therefore, the gain on disposal of plant assets account is credited with $600,000.
Transaction 4: Purchase of equipment on July 1.
- Equipment is an asset and is increased by $1,100,000 due to purchase of land. Therefore, Land account is debited with $1,100,000.
- Cash is an asset and is decreased by $1,100,000 due to the amount paid on purchase of equipment. Therefore, Cash account is credited with $1,100,000.
Transaction 5: Record of depreciation for the retired equipment on December 31, 2018.
- Depreciation expense is an expense, and it decreases the stockholder’s equity by $70,000. Therefore, Depreciation expense – Equipment is debited with $70,000.
- Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $70,000 that decreases the value of assets by $70,000. Therefore, the Accumulated depreciation-Equipment account is credited with $70,000.
Transaction 6: Retirement of equipment on December 31, 2018.
- Accumulated depreciation-Equipment is a contra asset with a normal credit balance. Its decreased value increases the value of the asset by $700,000. Therefore, Accumulated depreciation-Equipment account is debited with $700,000.
- Equipment is an asset and decreased due to sale of equipment by $700,000. Therefore, Equipment account is credited with $700,000.
Note 2:
The T-accounts are recorded after the recording of the
(b)
Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.
To Record: The adjusting entries for depreciation for 2018.
(b)
Explanation of Solution
Journalize the adjusting entries.
Record the adjusting entry for depreciation for building during the year 2018:
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2018 | Depreciation Expense (7) | 662,500 | ||
Accumulated Depreciation - Buildings | 662,500 | |||
(To record the adjusting entry for depreciation for building.) |
Table (2)
Working note:
Determine the amount of depreciation for building.
Cost of the buildings =$26,500,000
Useful life= 40 years
Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)
Record the adjusting entry for depreciation for equipment during the year 2018:
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2018 | Depreciation Expense (10) | 3,925,000 | ||
Accumulated Depreciation - Equipment | 3,925,000 | |||
(To record the adjusting entry for depreciation for equipment.) |
Table (3)
Working notes:
Determine the total depreciation expense for equipment for 2018.
Determine the remaining cost of the equipment as on December 31, 2018.
Particulars | Amount ($) |
Cost of the equipment as on January 1, 2018 | 40,000,000 |
Less: Sale of equipment on May 1, 2018 | (600,000) |
Retired equipment on December 31, 2018 | (700,000) |
Remaining cost of the equipment | 3,870,000 |
Table (4)
Determine the depreciation expense for the remaining cost of the equipment.
Remaining Cost of the equipment =$38,700,000(Refer Table 4)
Useful life= 10 years
Number of months used in 2018 = 12 months (January 1, 2018-December 31, 2018)
Determine the depreciation expense for the cost of the new equipment.
Cost of the new equipment purchased on July 1, 2018 =$1,100,000
Useful life= 10 years
Number of months used in 2018 = 6 months (July 1, 2018-December 31, 2018)
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
To Post: The above adjusting entries to T-accounts.
Solution:
Post the above journal entries in part (a) and adjusting entries in part (b) into the T-accounts.
Land is an asset with a normal debit balance.
Land Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
January 1, 2018 | Beginning Balance | 3,000,000 | June 1, 2018 | Cash | 1,000,000 | |
April 1, 2018 | Cash | 2,200,000 | December 31,2018 | Closing balance | 4,200,000 | |
December 31,2018 | Total | 5,200,000 | December 31,2018 | Total | 5,200,000 | |
January 1, 2019 | Beginning Balance | 4,200,000 |
Table (5)
Building is an asset with a normal debit balance.
Building Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
January 1, 2018 | Beginning Balance | 26,500,000 | December 31,2018 | Closing balance | 26,500,000 | |
December 31,2018 | Total | 26,500,000 | December 31,2018 | Total | 26,500,000 | |
January 1, 2019 | Beginning Balance | 26,500,000 |
Table (6)
Equipment is an asset with a normal debit balance.
Equipment Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
January 1, 2018 | Beginning Balance | 40,000,000 | May 1, 2018 | Cash | 600,000 | |
July 1, 2018 | Cash | 1,100,000 | December 31, 2018 | Accumulated Depreciation | 700,000 | |
December 31,2018 | Closing balance | 39,800,000 | ||||
December 31,2018 | Total | 39,800,000 | December 31,2018 | Total | 39,800,000 | |
January 1, 2019 | Beginning Balance | 39,800,000 |
Table (7)
Accumulated Depreciation-Buildings is a contra asset account with a normal credit balance.
Accumulated Depreciation-Buildings Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
December 31,2018 | Closing Balance | 12,587,500 | January 1, 2018 | Beginning Balance | 11,925,000 | |
December 31,2018 | Depreciation expense | 662,500 | ||||
December 31,2018 | Total | 12,587,500 | December 31,2018 | Total | 12,587,500 |
Table (8)
Accumulated Depreciation-Equipment is a contra asset account with a normal credit balance.
Accumulated Depreciation-Equipment Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 1, 2018 | Equipment | 440,000 | January 1, 2018 | Beginning Balance | 5,000,000 | |
December 31, 2018 | Equipment | 700,000 | May 1, 2018 | Depreciation expense | 20,000 | |
December 31, 2018 | Closing Balance | 7,875,000 | December 31, 2018 | Depreciation expense | 70,000 | |
December 31, 2018 | Depreciation expense | 3,925,000 | ||||
December 31 | Total | 9,015,000 | December 31 | Total | 9,015,000 |
Table (9)
(c)
To Prepare: the plant assets section of Company A’s
(c)
Explanation of Solution
Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are reported by a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position.
Company A | ||
Partial Balance Sheet | ||
As of December 31, 2018 | ||
Assets |
Amount ($) | Amount |
($) | ||
Plant assets: | ||
Land | 4,200,000 | |
Buildings | 26,500,000 | |
Less: Accumulated depreciation | (12,587,500) | 13,912,500 |
Equipment | 39,800,000 | |
Less: Accumulated depreciation | (7,875,000) | 31,925,000 |
Total plant assets | 50,037,500 |
Table (10)
Note 3:
Refer the T-accounts for the balances of the plant assets.
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