91Ó°ÊÓ

Depreciation is an expense incurred on an asset that has become obsolete due to erosion and abrasion.An asset can be depreciated in various ways that help bring the exact value of the asset at the time of sale.

The $9,000 loss on land condemnation ($40,000 – $31,000) should be included as a unique and irregular item on the income statement. The $35,000 land acquisition has no impact on the income statement.

Working notes:

Calculation of Land condemnation

$\begin{array}{rcl}\mathit{L}\mathit{a}\mathit{n}\mathit{d}\mathbf{}\mathit{c}\mathit{o}\mathit{n}\mathit{d}\mathit{e}\mathit{m}\mathit{n}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{l}\mathit{a}\mathit{n}\mathit{d}\mathbf{-}\mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{c}\mathit{e}\mathit{e}\mathit{d}\mathit{s}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\\ & & \end{array}$

On the destruction of the structure, there is no acknowledged benefit or loss. The full purchase price ($15,000) is given to the land, reduced by the demolition revenues ($3,600).

The profit from the warehouse's destruction should be reported as an uncommon and occasional item. The profit is calculated as follows:

Some argue that when the proceeds are reinvested in similar assets, a portion of the gain should be delayed. Such an approach, we feel, should not be authorized. GAAP does not allow the gain to be deferred in this circumstance.

The recognized gain on the transaction would be computed as follows:

Working notes:

Calculation of total gain recognized

$\begin{array}{rcl}\mathit{T}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{g}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}& \mathbf{=}& \mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{c}\mathit{c}\mathit{u}\mathit{r}\mathit{e}\mathit{d}\mathbf{×}\frac{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}}{\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{+}\mathbf{F}\mathbf{a}\mathbf{i}\mathbf{r}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{×}\frac{\mathbf{\$}\mathbf{900}}{\mathbf{\$}\mathbf{900}\mathbf{+}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{300}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{250}\\ & & \end{array}$

Calculation of gain deferred.

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{d}\mathit{e}\mathit{f}\mathit{e}\mathit{r}\mathit{r}\mathit{e}\mathit{d}& \mathbf{=}& \mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{-}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{250}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{750}\\ & & \end{array}$

Most likely, this profit would need to be included in other revenues and profits. If the firm considers that such a circumstance is seldom and important, it may be recorded as a unique item. The new machine's cost would be capitalized at $4,550.

The furniture donation would be recorded as a $3,100 contribution expenditure with a $950 gain on furniture disposal.If desired, the firm can net the contribution expenditure and corresponding gain.

Working notes:

Calculation of gain on disposing of furniture

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{ }\mathit{d}\mathit{i}\mathit{s}\mathit{p}\mathit{o}\mathit{s}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{f}\mathit{u}\mathit{r}\mathit{n}\mathit{i}\mathit{t}\mathit{u}\mathit{r}\mathit{e}& \mathbf{=}& \mathit{F}\mathit{u}\mathit{r}\mathit{n}\mathit{i}\mathit{t}\mathit{u}\mathit{r}\mathit{e}\mathbf{}\mathit{d}\mathit{o}\mathit{n}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{-}\left(Cost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{100}\mathbf{-}\left(\$10,000-\$7,850\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{950}\\ & & \end{array}$

The $2,580 loss on the car sale should presumably be stated in the other costs or losses section.

Working notes:

Calculating loss on sale of the car

$\begin{array}{rcl}\mathit{L}\mathit{o}\mathit{s}\mathit{s}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{c}\mathit{a}\mathit{r}& \mathbf{=}& \mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{p}\mathit{r}\mathit{o}\mathit{c}\mathit{e}\mathit{e}\mathit{d}\mathit{s}\mathbf{-}\left(Cost-Accumulateddepreciation\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{960}\mathbf{-}\left(\$9,000-\$3,460\right)\\ & \mathbf{=}& \left(\$2,580\right)\\ & & \end{array}$

Note: Here, the bracket denotes the negative balance