ACCT 202/EXERCISE QUESTION During the current year, Ramirez Developers disposed of plant assets in the following transaction Feb. 10 Office equipment costing $26,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to $25,800. Apr. 1 Ramirez sold land and a building to Claypool Associates for $900,000, receiving $100,000 cash and 5 year, 9% note receivable for the remaining balance. Ramirez’s records showed the following amounts: Land, $50,000; Building, $550,000; Accumulated Depreciation: Building (at the date of disposal), $250,000. Aug.15 Ramirez traded in an old truck for a new one. The old truck had cost $26,000, and its accumulated depreciation amounted to $18,000. The list price of the new truck was $39,000, but Ramirez received a $10,000 trade in allowance for the old truck and paid only $29,000 in cash. Ramirez includes trucks in its Vehicles account. Oct.1 Ramirez traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computer’s list price was $8,000. Ramirez accepted a trade in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a one year, 8% note payable for the $6,000 balance owed. Instructions; a) Prepare journal entries to record each of the disposal transactions. Assume that depreciation expense on each asset has been recorded up to the date of disposal. Thus you need not update the accumulated depreciation figures stated in the problem. b) Will the gains and losses recorded in part a above affect the gross profit reported in Ramirez’s income statement? Explain Solution Feb 10 Loss on Disposal of Plant Assets Accumulated Depreciation: Office Equipment Office Equipment 200 25,800 26,000 Scrapped office equipment; received no salvage value. Apr Aug Oct 1 15 1 Cash Notes Receivable Accumulated Depreciation: Building Land Building Gain on Sale of Plant Assets Sold land and building for a $100,000 cash downpayment and a 5-year, 9% note for the balance. 100,000 800,000 250,000 Vehicles (new truck) Accumulated Depreciation: Vehicles (old truck) Vehicles (old truck) Gain on Disposal of Plant Assets Cash To record trade-in of old truck on new; trade-in allowance exceeded book value by $2,000. 39,000 18,000 Office Equipment (new computer) Loss on Trade-in of Plant Assets 8,000 3,500 11,000 Accumulated Depreciation: Office Equip. (old computer) 50,000 550,000 550,000 26,000 2,000 29,000 Office Equipment (old computer) Cash Notes Payable Acquired new computer system by trading in old computer, paying part cash, and issuing a 1-year, 8% note payable. Recognized loss equal to book value of old computer ($4,000) minus trade-in allowance ($500). b. Gains and losses on asset disposals do not affect gross profit because they are not part of the cost of goods sold. Such gains and losses do, however, affect net income reported in a firm’s income statement. 15,000 1,500 6,000