Disposal of Plant Asset Citano Company has a used executive charter plane that o

Question

Disposal of Plant Asset

Citano Company has a used executive charter plane that originally cost $850,000. Straight-line depreciation on the plane has been recorded for six years, with an $85,000 expected salvage value at the end of its estimated eight-year useful life. The last depreciation entry was made at the end of the sixth year. Eight months into the seventh year, Citano disposes of the plane.

Required

Prepare journal entries to record:
a. Depreciation expense to the date of disposal.
b. Sale of the plane for cash at its book value.
c. Sale of the plane for $220,000 cash.
d. Sale of the plane for $200,000 cash.
e. Destruction of the plane in a fire. Citano expects a $198,000 insurance settlement.

General Journal Reference Description Debit Credit a. AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer To record depreciation expense for 8 months. b. Cash Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer To record sale of airplane. c. Cash Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer Airplane Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer To record sale of airplane. d. Cash Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer Accumulated Depreciation - Airplane Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer To record sale of airplane. e. AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer Loss of insurance settlement Answer Answer Accumulated Depreciation - Airplane Answer Answer AnswerAccumulated Depreciation - AirplaneAirplaneCashDepreciation Expense - AirplaneGain on Sale of Plant AssetsLoss of insurance settlementLoss on Sale of Plant AssetsReceivable from insurance company Answer Answer To record insurance claim on airplane destroyed by fire.

Explanation / Answer

Citano Company

Disposal of plant asset

Entries:

Journal Entries in the books of Citano Company:

Date

Account Titles and Explanation

Debit

Credit

a.

Depreciation expense - Airplane

$63,750

Accumulated Depreciation - Airplane

$63,750

(To record depreciation expense for 8 months in the seventh year)

b.

Cash

$212,500

Accumulated Depreciation - Airplane

$637,500

Airplane

$850,000

(To record disposal of airplane at book value)

c.

Cash

$220,000

Accumulated Depreciation - Airplane

$637,500

Gain on sale of Airplane

$7,500

Airplane

$850,000

(To record gain on disposal of airplane)

d.

Cash

$200,000

Accumulated Depreciation - Airplane

$637,500

Loss on sale of Airplane

$12,500

Airplane

$850,000

(To record loss on sale of disposal of airplane)

e.

Insurance Settlement

$198,000

Accumulated Depreciation - Airplane

$637,500

Loss

$14,500

Airplane

$850,000

(To record insurance settlement and loss on destruction of the plane in a fire)

Calculations of accumulated depreciation and book value -

Company uses the straight line depreciation method,

Depreciation expense = depreciable base x 1/useful life

Depreciable base = cost – salvage value

Cost = $850,000

Salvage value = $85,000

Useful life = 8 years

Depreciable base = $850,000 - $85,000 = $765,000

Annual depreciation expense = $765,000/8 = $95,625

Accumulated depreciation for 6 years = $95,625 x 6 = $573,750

Book value in Year 7 = cost – accumulate depreciation

= $850,000 - $573,750 = $276,250

The asset was disposed 8 months in seventh year,

So, depreciation for the 8 months in seventh year = annual depreciation expense x 8/12

                  = $95,625 x 8/12 = $63,750

Accumulated depreciation up to the date of disposal = $573,750 + $63,750 = $637,500

So, book value at the date of disposal = $850,000 - $637,500 = $212,500

The company records a gain of $7,500 as follows,

Gain = sale proceeds – book value

= $220,000 - $212,500 = $75,00

the company records a loss of $12,500 as follows,

loss = sale proceeds – book value

= $200,000 - $212,500 = -$12,500

Book value of asset destroyed in fire = $212,500

Insurance settlement               = $198,000

Loss                                        = -$14,500

Journal Entries in the books of Citano Company:

Date

Account Titles and Explanation

Debit

Credit

a.

Depreciation expense - Airplane

$63,750

Accumulated Depreciation - Airplane

$63,750

(To record depreciation expense for 8 months in the seventh year)

b.

Cash

$212,500

Accumulated Depreciation - Airplane

$637,500

Airplane

$850,000

(To record disposal of airplane at book value)

c.

Cash

$220,000

Accumulated Depreciation - Airplane

$637,500

Gain on sale of Airplane

$7,500

Airplane

$850,000

(To record gain on disposal of airplane)

d.

Cash

$200,000

Accumulated Depreciation - Airplane

$637,500

Loss on sale of Airplane

$12,500

Airplane

$850,000

(To record loss on sale of disposal of airplane)

e.

Insurance Settlement

$198,000

Accumulated Depreciation - Airplane

$637,500

Loss

$14,500

Airplane

$850,000

(To record insurance settlement and loss on destruction of the plane in a fire)

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---