Question

Question 1: (12 marks) Part A: Lambton Company purchased equipment in 2021 for $75,000 and estimated an $3,000 residual value at the end of the equipment's B-year useful life. At December 31, 2027, there was $63,000 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2028, the equipment was sold for $18,000. Required Part A: a) Prepare the appropriate joumal entries to update depreciation and then to remove the equipment from the books of Lambton Company on March 31, 2028. Part B: Gananoque Company sold a delivery truck for $17,500. The delivery truck originally cost $28,500 in 2021 and $4,000 was spent on a major overhaul in 2027 (charged to Delivery Truck account), Accumulated Depreciation on the delivery truck to the date of disposal was $15,000 Required Part B: Prepare the appropriate journal entry to record the disposition of the delivery truck. Part C: Marner Wholesalers sold office equipment that had a net book value of $7,450 for $10,000. The office equipment originally cost $19,450 and it is estimated that it would cost $23,000 to replace the office equipment. Required Part : Prepare the appropriate journal entry to record the disposition of the office equipment

Answer 1

Before moving to the solution for better understanding of the respective journal entries, notes is mentioned upfront.

Notes :
In the given cases, When a Fixed asset is sold the accounting treatment will be as follows:
1. Capitalized cost of asset sold i.e, Original cost of the asset plus the subsequent capitalization expense for the respective asset shall be reversed from the block of the assets.
2. Accummulated depreciation pertaining to the asset sold shall be reversed from accumlated depreciation reserve.
3. The difference between net book value and the selling price shall be recorded as profit or loss in the income statement.
4. If the sale value of the asset is exceeding the cost specified in point 1, then the difference between the capitalized cost of asset sold and the selling price shall be transferred to capital reserve and the amount equal to the capitalized cost of the asset sold will be recorded as gain on sale of the asset as the sale value is realizing the entire cost of the asset of which portion was already provided as depreciation.

Solution is as follows:

All amounts are in '$.

1)

Part A
Particulars	Debit	Credit
Bank A/c Dr	18,000
Accumulated Depreciation A/c (Note 2)                                                                 Dr	63,000
To Equipment A/c (Cost of the asset sold - Note 1)		75,000
To Profit on sale of Equipment A/c (Balancing figure i.e., 18000+63000-75000)		6,000
(Being disposal of equipment recorded in books)

Working note for Part A: Profit on sale of equipment

a) Net Book Value = Cost of the asset - accummulated depreciation
Net Book Value = 75,000 - 63,000 = 12,000

b) Sale value = 18,000
c) Profit/(loss) = Sale value - net book value
= 18000-12000
Profit on sale of equipment = 6000

The same can be alternatively arrived as balancing figure as shown in the journal entry

2)

Part B
Particulars	Debit	Credit
Bank A/c Dr	17,500
Accumulated Depreciation Reserve A/c (Note 2) Dr	15,000
To Delivery truck A/c (Cost of the asset sold - Note 1)		32,500
To Profit on sale of Equipment (Balancing figure i.e., 17500+15000-32500)		-
(Being disposal of delivery truck recorded in books)

Working note for Part B: Profit or loss on sale of delivery truck

a) Net Book Value = Capitalized Cost of the asset - accummulated depreciation
Net Book Value = 28,500+4000 - 15,000 = 17,500

b) Sale value = 17,500
c) Profit/(loss) = Sale value - net book value
= 17,500-17,500
Profit/(loss) = 0

The same can be alternatively arrived as balancing figure as shown in the journal entry

Also, as mentioned in note 1, capitalized cost of the asset i.e., the original cost of the cost and subsequent cost of the asset shall be reversed from the books of accounts.

In the question it was clearly stated that the 4,000 was due to major overhaul and charged to delivery truck account which implies it is capitalized, thereby 32,500 has been reversed as cost of the asset.

3)

Part C
Particulars	Debit	Credit
Bank A/c Dr	10,000
Accumulated Depreciation Reserve A/c (Note 2 and working note below)              Dr	12,000
To Office Equipment A/c (Cost of the asset sold - Note 1)		19,450
To Profit on sale of Equipment (Balancing figure i.e., 10,000+12,000-19,450)		2,550
(Being disposal of office equipment recorded in books)

Working note for Part C:  

Accumulated Depreciation = Cost of the asset - net book value
Accumulated Depreciation = 19,450 - 7,450 = 12,000

Profit on sale of office equipment:

a) Net Book Value = Cost of the asset - accummulated depreciation
Net Book Value = 7,450 (given)

b) Sale value = 10,000
c) Profit/(loss) = Sale value - net book value
= 10000-7,450
Profit on sale of office equipment = 2,550

The same can be alternatively arrived as balancing figure as shown in the journal entry.