Fact Pattern:On January 2, Year 3, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, Year 6. There was no established exchange price for the equipment, and the market value of the note cannot be reasonably approximated. The prevailing rate of interest for a note of this type at January 2, Year 3, was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme's Year 3 income statement, what amount should be reported as gain (loss) on sale of equipment?

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Business

Camryn Rollins

8 May, 19:48

Fact Pattern:On January 2, Year 3, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, Year 6. There was no established exchange price for the equipment, and the market value of the note cannot be reasonably approximated. The prevailing rate of interest for a note of this type at January 2, Year 3, was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme's Year 3 income statement, what amount should be reported as gain (loss) on sale of equipment?

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Sean Reeves · Answer 1

Loss on disposal = $30,000

Explanation:

Present Value of the Note exchanged in Yr 3 = 0.75 x $600,000 = $450,000

Carrying Value of the Equipment sold = $480,000

Loss on disposal = $480,000 - $450,000

= $30,000

Loss on disposal arises since the amount realized on the asset sold is less than it carrying value.