Question

During the current year, Hitchcock Developers disposed of plant assets in the following transactions.

Feb.	10		Office equipment costing $24,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to $21,800.
Apr.	1		Hitchcock sold land and a building to Claypool Associates for $900,000, receiving $100,000 cash and a 5-year, 9 percent note receivable for the remaining balance. Hitchcock’s records showed the following amounts: Land, $50,000; Building, $550,000; Accumulated Depreciation: Building (at the date of disposal), $260,000.
Aug.	15		Hitchcock traded in an old truck for a new one. The old truck had cost $26,000, and its accumulated depreciation amounted to $18,000. The list price of the new truck was $39,000, but Hitchcock received a $10,000 trade-in allowance for the old truck and paid $28,000 in cash. Hitchcock includes trucks in its Vehicles account.
Oct.	1		Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computer’s list price was $8,000. Hitchcock accepted a trade-in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a 1-year, 8 percent note payable for the $6,000 balance owed.

Required:
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. Do gains and losses on asset disposals affect gross profit?

Answer 1

Requirement-a:

Date	Account Title and Explanation	Debit $	Credit $
Feb. 10	Accumulated depreciation-Office equipment	21,800
	Loss on disposal of office equipment (24000-21800)	2,200
	Office equipment		24,000
	(Disposal of office equipment)
Apr. 1	Cash	100,000
	Note receivable (900,000-100,000)	800,000
	Accumulated depreciation-Building	260,000
	Land		50,000
	Building		550,000
	Profit on sale of land and building		560,000
	(Sold land and building)
Aug. 15	Vehicles (New truck)	39,000
	Accumulated depreciation-Vehicles	18,000
	Loss on sale of vehicle	7,000
	Vehicles (Old truck)		26,000
	Cash		28,000
	Allowance received		10,000
	(Old truck traded for a new one)
Oct. 1	Office equipment (New computer)	8,000
	Accumulated depreciation-Office equipment	11,000
	Loss on sale of office equipment	4,000
	Office equipment (Old computer)		15,000
	Cash		1,500
	Note payable		6,000
	Allowance received		500
	(Old computer traded for a new one)

Requirement-b: No.

Gross profit = Sales - Cost of goods sold

Gains and losses on disposal affects net profit and not gross profit.

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