Question

Swann Company sold a delivery truck on April 1, 2016. Swann had acquired the truck on January 1, 2012, for $45,500. At acquisition, Swann had estimated that the truck would have an estimated life of 5 years and a residual value of $3,000. At December 31, 2015, the truck had a book value of $11,500. Required: 1. Prepare any necessary journal entries to record the sale of the truck, assuming it sold for: a. $11,125 b. $7,525 2. How should the gain or loss on disposal be reported on the income statement

Answer 1

The question involves creating journal entries for the sale of a fixed asset at different prices and explaining how to report the resulting gain or loss on the income statement. The entries include recognizing cash received, removing the asset and its accumulated depreciation, and recording the gain or loss.

Step-by-step explanation:

The subject of this question is business, specifically focusing on the accounting treatment of fixed asset disposal and the reporting of gains or losses on a company's income statement. To answer this question, we'll need to prepare journal entries based on different selling prices provided and calculate the gain or loss from disposal.

Journal Entries for the Sale of the Truck

1. When the truck sells for $11,125:

• Debit Cash $11,125
• Debit Accumulated Depreciation $(Book value - Residual value)
• Credit Truck (Cost) $45,500
• Credit Gain/Loss on Disposal $(Selling price - Book value)
  

2. When the truck sells for $7,525:

• Debit Cash $7,525
• Debit Accumulated Depreciation $(Book value - Residual value)
• Credit Truck (Cost) $45,500
• Credit Gain/Loss on Disposal $(Selling price - Book value)

Reporting on the Income Statement

The gain or loss on disposal of the truck would be reported in the income statement under the section for other income and expenses. A loss would be shown as an expense and a gain as revenue.

Answer 2

1.

Journal Entries

a.

Dr. Cash_________________$11,125

Dr. Accumulated Depreciation $36,125

Cr. Truck ________________ $45,500

Cr. Gain on Disposal ________$1,750

b.

Dr. Cash_________________$7,525

Dr. Loss on Disposal ________$1,850

Dr. Accumulated Depreciation $36,125

Cr. Truck ________________ $45,500

2.

a.

The gain is reported as a realized gain in the income statement after operating income for the period.

b.

The loss is reported as a realized loss in the income statement after operating income for the period.

Step-by-step explanation:

1.

We need to calculate the depreciation for the 3 months of 2016.

Depreciation for the period = ( ( Initial cost -Residual Value ) / Useful life ) x Time Fraction = ( ( $45,500 -$3,000 ) / 5 ) x 3/12 = $2,125

Book Value on April 1, 2016 = Book Value on December 31, 2015 - Depreciation for 2016 = $11,500 - $2,125 = $9,375

Accumulated Depreciation = Initial cost - Book value = $45,500 - $9,375 = $36,125

Now compare The bok value o sale price to calculate the gain or losss

a.

Gain = Sale Value - Book value = $11,125 - $9,375 = $1,750

b.

Loss = Book Value - Sale value = $9,375 - $7,525 = $1,850

2.