Question

Manufacturing Ltd. (ML) discontinued use of three assets during 20X2:

a. A specialized piece of equipment that originally cost $200,000 when purchased was shut down and placed in the far corner of the manufacturing facility on 30 June. It is being depreciated over 20 years on a straight line basis. The carrying value (i.e., the net book value) was $50,000 at the beginning of 20X2. ML has no plans to use the equipment in the future since it was designed to produce a product MI has discontinued. Because the equipment is very specialized to the needs of MI and has no market to sell to, the salvage value is zero.

b. The company stopped using its product line B on 1 April 20X2 due to lack of demand for one of their products. Its use will be restored if and when demand picks up for that product. The product line’s original cost was $660,000, and it was 60% depreciated on 1 January 20X2.

c. ML ceased to use a company owned cargo plane on 30 September. The plane cost $7,000,000 and now has a carrying value of $2,400,000. The company plans to find a buyer as quickly as possible and has engaged a dealer to look for a buyer. The agent expects to find a buyer within the following six to eight months. The asking price is $2,000,000. The dealer will take a 3% commission on the sale.

 

Required:

How should each asset be reported on ML’s 20X2 year end balance sheet? Be specific as to classification and amount. Prepare journal entries to properly record the change of status of each asset.

Answer 1

a.   

The equipment has been abandoned, as it will not be used in the future and it is not saleable. Depreciation of $5,000 should be taken for the first half of 20X2, and then the remaining book value should be written down to fair value less costs to sell, which appears to be zero:

 

30 June 20X2:

   

Depreciation expense		5,000
	Accumulated depreciation ­– equipment		5,000

      

Accumulated depreciation ­– equipment		155,000
Loss on abandonment of equipment		45,000
	PP&E – equipment		200,000

 

The depreciation expense should be kept separate from the loss on abandonment. Students might be tempted to combine these two entries and record a net loss but this is not correct.

 

b.   

This is an idle asset. Depreciation should continue, even though the asset is not currently being used. There is no change of status on the SFP.

 

c.   

The asset has been designated for sale, an agent has been contracted, and sale is expected within a year. The asset should be revalued at fair value less costs to sell (i.e., estimated selling price minus the 3% commission) and reclassified as an “available for sale” current asset.

 

The journal entry will appear as follows:

 

30 September 20X2:

   

Aircraft held for sale ($2,000,000 × 97%)		1,940,000
Accumulated depreciation – cargo plane		4,600,000
Loss from writedown of cargo plane to NRV		460,000
	Tangible capital assets – cargo plane		7,000,000