Lesson 5 Flashcards
The gain or loss of a disposed of asset is what?
A correction of net income for the years during which the company used the fixed asset.
Involuntary conversion
when an asset’s service is terminated through firs, flood, theft, or condemnation.
Delta River Co sold manufacturing equipment with a cost of $44,000 and accumulated depreciation of $32,000 for $9,000.
What should be included in the JE to record this transaction?
A debit to a loss account for $3,000
When an asset is sold, the asset account and the accumulated depreciation (contra-asset) account are “zeroed-out” and the resulting difference is the cost basis of the asset to determine if the asset was sold at a gain or a loss.
The book basis was $44,000 (original value) less $32,000 (accumulated depreciation = $12,000. Since the asset was sold for $9,000, the JE must include a debit to the loss on the sale of asset account. the complete JE would be:
Debit Cash $9,000
Debit Accumulated Depreciation $32,000
Debit Loss $3,000
Credit Equipment $44,000.
Bogle Co purchased machines for $320,000 on January 1, 2014. Straight line depreciation has been recorded based on a $20,000 salvage value and a 5 year useful life. The machinery was sold on May 1, 2018 at a gain of $6,000.
How much cash did Bogle receive from the sale of the machinery?
$66,000
Typically a company will record depreciation for the period of time in the current year prior the date of sale. The depreciable basis of the asset is $320,000 less the $20,000 salvage value, or $300,000. Annual depreciation expense is $300,000/5years =$60,000/year. Accumulated Depreciation = $60,000 (2014)+$60,000 (2015) + $60,000 (2016)+ $60,000 (2017) + $20,000 [$60,000x (4month/12month)] = $260,000. Book value - $320,000 (original cost) - $260,000 (accumulated depreciation) = $60,000. Sales Price - Book Value = Gain/Loss Sales Price- $60,000 = $6,000; Sales Price = $66,000.
Which term is used to describe the termination of an asset’s service due to theft, fire, etc.?
Involuntary conversion
