Assignment 1

Question No. 1
Bob & Robin, Inc., purchased a new machine on October 1, 2001, at a cost of $144,000. The machine’s
estimated useful life at the time of the purchase was 6 years, and its residual value was 12000.
Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2001, under each
of the methods listed below (assume that the half-year convention is used):
1- Straight-line.
2- 200% declining-balance.
3- 150% declining-balance (not switching to straight-line).
b. Which of the three methods computed in part (a) is most common for financial reporting
purposes? Explain.
c. Assume that Bob & Robin sell the machine on December 31, 2004, for $40,000 cash.
Compute the resulting gain or loss from this sale under each of the depreciation methods
used in part a. Does the gain or loss reported in the company’s income statement have any
direct cash effects? Explain.

Sol:
 a. Straight Line
Year Computaion Dep. Expense Acc. Dep. Book Value

0 144,000

2001 132000/6*1/2 11000 11000 133,000

2002 132000/6 22000 33000 111,000

2003 132000/6 22000 55000 89,000

2004 132000/6 22000 77000 67,000

2005 132000/6 22000 99000 45,000

2006 132000/6 22000 121000 23,000

2007 132000/6*1/2 11000 132000 12,000

b. Bob &amp robin will probably use the straight line method for financial reporting purpose as
this method results in the least amount of depreciation in the early years of the assests
useful life.

c. Striaght Line:

Cash proceeds
Book Value on Loss
on disposal

200% Declinig Balance:

Cash proceeds
Book Value on Gain
on disposal

150% Declinig Balance:

Cash proceeds
Book Value on
Loss on disposal

The reported gain or loss on the sale of an asset has no direct cash effects. The only direct cash
effect associated with the sale of this machine is the received by Bob &amp Inc. from the sale of
the machine.

Question No. 2
During the current year, James Construction disposed of plant assets in the following transactions:

Jan. 6 Equipment costing $22,000 was given to a scrap dealer at no charge. At the date of
disposal, accumulated depreciation on the office equipment amounted to 19,500.

Date Detail Dr Cr

Jan. 6 Loss on Disposal of Plant Asset 2500

Acc. Dep.: Office Equip. 19500

Office Equipment 22000

Scrapped Equip.: received no salvages

Mar. 3 Cash 100000

Notes Receivable 650000

Acc. Depreciation: Building 300000

Land 50000

Building 700000

Gain on sales of Plant Asset 300000

Sold land&buildingfor a 100000 cash

down payment and a 5 year 12% note

for the balance

July. 10 New truck 40000

Acc. Depreciation:old truck 18000

Old truck 22000

 Gain in Disposal Asset 6000

Cash 30000

To record trade in of old truck on new

trade in allowande exceed book value

by 6000

Sept. 3 Office Equip.: (new computer) 6000

Loss on Trade in Plant Asset 1800

Acc. Depreciation: Old computers 8000

Office Equip.: Old Computer 10000

Cash 1000

Notes Payable 4800

Acquired new computer system by

trading in old computer paying part in

cash, and issuing a 1 year 10% notes

payable. Recognized loss equal to book

value of old computer minus trade in

Mar .3 James sold land and a building for $750,000, receiving $100,000 cash and a 5year,
12% note receivable for the remaining balance. James’s records showed the
following amounts: Land, $50,000; Buildings, $700,000; Accumulated Deprecation:
Building (at the date of disposal), $300,000.

Jul. 10 James traded in an old truck for a new one. The old truck had cost $22,000, and its
accumulated depreciation amounted to $18,000. The list price of the new truck was
$40,000, but James received a $10,000 trade-in allowance for the old truck and paid
only $30,000 in cash. James includes trucks in its Vehicles account.

Sept. 3 James traded in its old computer system as part of the purchase of a new system.
The old system had cost $10,000, and its accumulated depreciation amounted to
$8,000. The new computer’s list price was $6,000. James accepted a trade-in
allowance of $200 for the old computer system, paying $1,000 down in cash, and
issuing a 1-year, 8% note payable for the $4,800 balance owed.

Instructions:
a. Prepare journal entries to record each of the disposal transactions. Assume that
depreciation expense on each asset has been recorded up to the date of disposal. Thus,
you need not update the accumulated depreciation figures stated in the problem.

b. Will the gains and losses recorded in part a above affect the gross profit reported in
James’s income statement? Explain.

c. Explain how the financial reporting of gains and losses on plant assets differs from the
financial reporting of unrealized gains and losses on marketable securities discussed in

Chapter 7. Sol:

a. Journal

allowance.

b. Gains and losses on the asset disposals do not affect gross profit because they are
not part of the cost of goods sold. Such gain and losses do, however affect net
income reported in a firm's income statement.

c. Unlike realized gains and losses on asset disposals, unrealized gains and losses on
marketable securities are not generally in a firm's income statement. Instead they
are reported in the balance sheet as a component of stockholder's equity.

200% Declining-balance 150% Decclining-balance

Year Computation Dep. Expense Acc. Dep. Book Value Year Computation Dep. Expense Acc. Dep. Book Value

0 144000 0 144000

2001 144000*33.33%*1/2 23760 23760 120240 2001 144000*25%*1/2 18000 18000 126000

2002 23760*33.33% 8830.8 32590.8 111409.2 2002 126000*25% 31500 49500 94500
2003 111409.2*33.33% 36765.036 69355.836 74644.164 2003 94500*25% 23625 73125 70875

2004 74644.164*33.33% 24632.57412 93988.41012 50011.58988 2004 70875*25% 17718.75 90843.75 53156.25
2005 50011.5899*33.33% 16503.82467 110492.2348 33507.76521 2005 53156.25*25% 13289.0625 104132.8125 39867.1875

2006 144000-12000 132000 242492.2348 -98492.23479 2006 39867.1875*25% 9966.796875 114099.6094 29900.39063