Question

In 2014, Blanchard Corporation has plant equipment that originally cost $75,000 and has accumulated depreciation of $30,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should Blanchard use to record the retirement of the equipment?

a. Loss on Disposal of Plant Assets 45,000 Equipment 45,000
b. Plant Equipment 75,000 Accumulated Depreciation – Equipment 30,000 Loss on Disposal of Plant Assets 45,000
c. Accumulated Depreciation – Equipment 30,000 Loss on Disposal of Plant Assets 45,000 Equipment 75,000
d. Loss on Disposal of Plant Assets 45,000 Accumulated Depreciation – Equipment 45,000

Answer 1

The answer is C.

The correct journal entry should be as follows:

Debit Accumulated Depreciation - Equipment with $30,000

Debit Loss on Disposal of Plant Assets with $45,000

Credit Equipment Account with $75,000

To record the retirement of plant assets and the loss on retirement.

Step-by-step explanation:

When an item of equipment is retired due to obsolescence, the balance on the accumulated depreciation is transferred to the credit of the account. If the item is sold at scrap value, the scrap value is also credited to the account. The difference is either a loss on disposal or a gain.

An asset that is retired shows that there is no disposal value.

Answer 2

The correct answer is Option B.

Step-by-step explanation:

Obsolescence of an asset occurs when the value of an asset has reduced drastically due to radical technological innovation or there is now a better technique used in the production process that renders the old equipment worthless or less productive.

The appropriate journal entries to record the disposal of the asset are:

Debit Accumulated Depreciation – Equipment $30,000

Debit Loss on Disposal of Plant Equipment $45,000

Credit Plant Equipment $75,000

(To record disposal of an asset)

Note that the proceed on the disposal is zero since the organization did not put up the asset for sale.