Question

Equipment costing $275,000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $130,000. An insurance check for $330,000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a:

a. Gain on Disposal
b. Loss on Disposal
c. Credit to Equipment
d. Credit to Accumulated Depreciation

Answer 1

The entry to record the insurance proceeds and the disposition of the equipment will include a Gain on Disposal. This gain is calculated by subtracting the net book value of the equipment from the insurance proceeds, resulting in a $185,000 gain.

Step-by-step explanation:

When equipment that cost $275,000 is destroyed in a fire, with accumulated depreciation of $130,000, and insurance proceeds of $330,000 are received for replacement, the journal entry to record this transaction will include a Gain on Disposal. This is calculated by taking the insurance proceeds and subtracting the net book value of the equipment (cost minus accumulated depreciation). The net book value is $275,000 - $130,000 = $145,000. The gain is hence $330,000 - $145,000 = $185,000. The entry will include a debit to Cash (or Bank) for the insurance proceeds of $330,000, a credit to the Equipment account for the original cost of $275,000, a debit to Accumulated Depreciation for $130,000, and a credit to Gain on Disposal for the difference of $185,000.