Question

During the current year, Hitchcock Develops 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.

April 1 Hitchcock sold land and a building to Claypool Associates for $900,000, receiving $100,000 cash and a five-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), $250,000.

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 one-year, 8 percent note payable for the $6,000 balance owed.

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.

Answer 1

Financial effect of below transactions-:

Feb 10-: The Company has disposed Office Equipment at Nil Value. WDV of this asset $2,200 ($24,000 - $21,800) should be charged to Statement of Profit and Loss Accounts as PPE written off during the year.

April 1-: WDV of land and land building $350,000 ($600,000 - $250,000) was sold at $900,000. So gain of $550,000 ($900,000 - $350,000) needs to be as gain upon sale of land and building.

Consideration being receivable in cash and notes receivable will be accounted as an asset in the balance sheet.

Aug 15-: WDV of the old truck $8,000 ($26,000 - $18,000) and was exchange for $10,000. This means gain of $2,000 should be recognized in the financials.

New truck should be accounted at $28,000 under PPE.

Oct 1-: WDV of the old computer $4,000 ($15,000 - $11,000) and was exchanged for $500. So a loss of $3,500 should be recognized upon sale of the asset.

New Computer should be accounted for as $7,500 and consideration should be discharged by $1,500 in cash and balance $6,000 as notes payable.

Gains and loss upon sale of plant assets are realized gain or losses. This gain/loss are not operating activities of the company and hence recognized under other income/expenses. This is an investing activities under cash flow statement.

Unrealized gain or losses on marketable securities are added to carrying value of the investment. This is unrealized in nature and accounted fair valuation. Separate schedule is presented in financials showing different fair valuation methodologies adopted.