Disposal of Plant Asset

Ben Company has a used executive charter plane that originally cost L04 $1,000,000. Straight-line depreciation on the plane has been recorded for six years, with a $100,000 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, Ben 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 $300,000 cash.

d. Sale of the plane for $220,000 cash.

e. Destruction of the plane in a fire. Ben expects a $210,000 insurance settlement.

Answer and Explanation:

The Journal entry is shown below:-

a. Depreciation expense - Airplane Dr, $75,000

To Accumulated depreciation - Airplane $75,000

(Being depreciation expense for 8 months is recorded)

b. Cash Dr, $250,000

Accumulated depreciation - Airplane Dr, $750,000

To Airplane $1,000,000

(Being the sale of airplane is recorded)

c. Cash Dr, $300,000

Accumulated depreciation - Airplane $750,000

To Airplane $1,000,000

To Gain on sale of airplane $50,000

(Being the sale of airplane is recorded)

d. Cash Dr, $220000

Loss on sale of airplane Dr, $30,000

Accumulated depreciation - Airplane Dr, $750,000

To Airplane $1,000,000

(Being the sale of airplane is recorded)

e. Insurance settlement Dr, $210,000

Loss of insurance settlement Dr, $40,000

Accumulated depreciation - Airplane $750,000

To Airplane $1,000,000

(Being insurance claim on airplane destroyed by fire is recorded)

Working Note:-

Under Straight-line method:

Depreciation per annum = (Cost of asset - Salvage value) : Useful life

= ($1,000,000 - $100,000) : 8 years

= $112,500

So, the Ben company will depreciate the airplane for 8 years by $112,500 every year.

Accumulated depreciation for six years = $112,500 * 6 years

= $675,000

a. Depreciation expense for 8 months = $112,500 * (8 : 12)

= $75,000

b. Accumulated depreciation up to the date of disposal = Accumulated depreciation + Depreciation expense

= $675,000 + $75,000

= $750,000

Hence,

The Book value at the date of disposal = $1,000,000 - $750,000

= $250,000

c. Gain on sale of airplane = (Accumulated depreciation + Cash) - Cost of asset

= ($750,000 + $300,000) - $1,000,000

= $50,000

d. Loss on sale of airplane = Cost of asset - (Accumulated depreciation + Cash)

= $1,000,000 - ($750,000 + $220,000)

= $30,000

e. Loss of insurance settlement = Cost of asset - (Accumulated depreciation + Insurance settlement)

= $1,000,000 - ($750,000 + $210,000)

= $40,000