Question

Presented below is a schedule of property dispositions for Hollerith Co.

Schedule of Property Dispositions
		Cost		Accumulated Depreciation			Cash Proceeds		Fair Value		Nature of Disposition
Land		$40,000		—			$31,000		$31,000			Condemnation
Building		15,000		—			3,600		—			Demolition
Warehouse		70,000		$16,000			74,000		74,000			Destruction by fire
Machine		8,000		2,800			900		7,200			Trade-in
Furniture		10,000		7,850			—		3,100			Contribution
Automobile		9,000		3,460			2,960		2,960			Sale

The following additional information is available.

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased at a cost of $35,000.

Building: On April 2, land and building were purchased at a total cost of $75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated $16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of $90,000.

Machine: On December 26, the machine was exchanged for another machine having a fair value of $6,300 and cash of $900 was received. (The exchange lacks commercial substance.)

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

Indicate how these items would be reported on the income statement of Hollerith Co.

Answer 1

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased at a cost of $35,000.

The loss on the condemnation of the land of $9,000 ($40,000 – $31,000) should be reported as an unusual and for infrequent item on the income statement. The $35,000 land purchase has no income statement effect.

Building: On April 2, land and building were purchased at a total cost of $75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

There is no recognized gain or loss on the demolition of the building. The entire purchase cost ($15,000), decreased by the demolition proceeds ($3,600), is allocated to land.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated $16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of $90,000.

The gain on the destruction of the warehouse should be reported as an unusual and/or infrequent item. The gain is computed as follows:

Insurance proceeds		$74,000
Deduct: Cost	$70,000
Less: Accumulated Depreciation	16,000	54,000
Realized Gain		$20,000

Some contend that a portion of this gain should be deferred because the proceeds are reinvested in similar assets. We do not believe such an approach should be permitted. Deferral of the gain in this situation is not permitted under GAAP.

Machine: On December 26, the machine was exchanged for another machine having a fair value of $6,300 and cash of $900 was received. (The exchange lacks commercial substance.)

The recognized gain on the transaction would be computed as follows:

Fair Value of old machine		$7,200
Deduct: Book Value of old machine
Cost	$8,000
Less: Accumulated depreciation	2,800	5,200
Total gain		$2,000

Total gain recognized =$2,000 ×$900$900+$6,300 =$250    The gain deferred is $1,750 ($2,000 - $250). This gain would probably be reported in other revenues and gains. It might be reported as an unusual item if the company believes that such a situa­tion occurs infrequently and if material. The cost of the new machine would be capitalized at $4,550.

Fair Value of new machine	$6,300
Less: Gain deferred ($2000-$250)	1,750
Cost of new machine	$4,550

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

The contribution of the furniture would be reported as a contri­bution expense of $3,100 with a related gain on disposition of furniture of $950: $3,100 – ($10,000 – $7,850). The contribution expense and the related gain may be netted, if desired.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

The loss on sale of the automobile of $2,580: [$2,960 – ($9,000 – $3,460)] should probably be reported in the other expenses or losses section.