Question

Express Co, purchased equipment on March 1, 2015, for $95,000 on the account. The equipment had an estimated useful life of five years, with a residual value of $5,000. The equipment is disposed of on February 1, 2018. Express Co, use the diminishing-balance method of depreciation with a 20% rate and calculates depreciation for partial periods to the nearest month. The company has an August 31 year end.

a) Record the acquisition of the equipment on March 1, 2015,

b)Record depreciation on August 31,2015,2016 and 2017.

c)Record the disposal on February 1, 2018, under the following assumptions.

1: It was scrapped with no residual value.

2: It was sold for $55,000

3: It was sold for $45,000

4: It was traded for new equipment with a list price of $97,000. Express was given a trade-in allowance of $52,000 on the old equipment and paid the balance in cash. Express determined the old equipment fair value to be $47,000 at the date of the exchange.

What are the arguments in favor of recording gains and losses on disposals of property plant and equipment as part of the profit from the operation? what are the argument in favor of recording them as non-operation items?

Answer 1

Solution:
	Journal Entries:
a)	Record the acquisition of the equipment:
Date	Particulars	Debit	Credit
01-03-2015	Equipment	95000
	Accounts Payable		95000
b)	Record Depreciation:
Date	Particulars	Debit	Credit
31-08-2015	Depreciation	9500
	Accumulated Depreciation		9500
	(95000*20%*6/12)
31-08-2016	Depreciation	17100
	Accumulated Depreciation		17100
	[(95000-9500)*20%]
31-08-2017	Depreciation	13680
	Accumulated Depreciation		13680
	[(95000-9500-17100)*20%]
c)	Record of Disposal
1)	It was scrapped with no residual value
Date	Particulars	Debit	Credit
01-02-2018	Depreciation	5472
	Accumulated Depreciation		5472
	[(95000-9500-17100-13680)*20%*6/12]
	Accumulated Depreciation	45752
	Loss on Disposal	49248
	Equipment		95000
2)	It was Sold for $55,000
	Cash	55000
	Accumulated Depreciation	45752
	Equipment		95000
	Profit on Disposal		5752
3)	It was Sold for $45,000
	Cash	45000
	Accumulated Depreciation	45752
	Loss on Disposal	4248
	Equipment		95000
4)	It was traded with NEW EQUIPMENT:
	New Equipment	97000
	Discount Received		52000
	Cash		45000
	Discount Received	52000
	Old Equipment		47000
	Profit on traded		5000

Explanation:

In case of part 4 the disposal of equipment is operational activity because the equipment was traded by the Express and the gain raises from it also treated as operational gain.

But other cases i.e. 1,2 and 3 the gain and loss arises from disposal of equipment is a non-operating gain and losses. Because the same is not arises from any operational activities. It should be treated as capital gain or capital loss.