plant assets, natural resources, and intangibles chapter 9 copyright ©2014 pearson education, inc....
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Plant Assets, Natural Resources,
and Intangibles
Chapter 9
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 9-1
Learning Objectives
1. Measure the cost of a plant asset
2. Account for depreciation using the straight-line, units-of-production, and double-declining-balance methods
3. Journalize entries for the disposal of plant assets
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 9-2
Learning Objectives
4. Account for natural resources
5. Account for intangible assets
6. Use the asset turnover ratio to evaluate business performance
7. Journalize entries for the exchange of plant assets (Appendix 9A)
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Learning Objective 1
Measure the cost of a plant asset
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What Are Plant Assets?
Long-lived, tangible assets used in the operation of the business.
• Land• Buildings• Equipment• Furniture• Automobiles
Cost PrincipleThe actual cost of a plant
asset is its purchase price plus all the costs
necessary to get the asset ready for its
intended use.
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The Cost of Land
Land is not depreciable.
Includes:• Purchase price• Brokerage
commissions• Survey and legal fees• Delinquent property taxes• Title transfer fees• Cost of clearing the land• Cost of removing old buildings
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The Cost of Land
These costs are referred to as
Land Improvements.
Land Improvements ARE depreciated.
Does Not Include:• Fencing• Paving• Sprinkler systems• Lighting• Signs
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The Cost of Land
Smart Touch Learning purchases land on August 1, 2015, for $50,000 with a note payable. Other
costs related to this transaction include $4,000 in delinquent property taxes, $2,000 in transfer
taxes, $5,000 to remove an old building, and a $1,000 survey fee. The additional costs are paid
in cash.
What is the cost of the land on Smart Touch Learning’s books?
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The Cost of Land
Prepare the journal entry to record the purchase of the land.
Date Accounts and Explanation Debit Credit
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The Cost of Land
Prepare the journal entry to record the purchase of the land.
Date Accounts and Explanation Debit Credit
Aug. 1 Land 62,000 Notes Payable 50,000 Cash 12,000 To record purchase of land with cashand note payable.
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The Cost of Buildings
When a Building is constructed, the costs include:
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The Cost of Buildings
When a Building is purchased, the costs include:
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The Cost of Machinery and Equipment and Furniture and Fixtures
The costs include:
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Lump-Sum Purchases
• Purchasing several assets for a single price.– Sometimes called a
“basket purchase”
• Each asset must be recorded separately.
• Allocate total cost to each asset based on relative market value.
On August 1, Smart Touch Learning
purchased land and building with a
$100,000 note. The land is appraised at
$30,000 and the building is
appraised at $90,000.
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Lump-Sum Purchases
AssetMarket Value
% of Total Value
Total Purchase
Price
Cost Assigned to Each Asset
Land 30,000$ 25% * 100,000$ = 25,000$ Building 90,000 75% * 100,000$ = 75,000$ Total 120,000$ 100% 100,000$
Date Accounts and Explanation Debit Credit
Prepare the journal entry.
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Lump-Sum Purchases
AssetMarket Value
% of Total Value
Total Purchase
Price
Cost Assigned to Each Asset
Land 30,000$ 25% * 100,000$ = 25,000$ Building 90,000 75% * 100,000$ = 75,000$ Total 120,000$ 100% 100,000$
Aug. 1 Land 25,000 Building 75,000 Notes Payable 100,000 To record purchase of land and building.
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>TRY IT!
Date Accounts and Explanation Debit Credit
Budget Banners pays $200,000 for a bulk purchase of land, building, and equipment. The land had a market value of $22,000, the building had a market value of $187,000, and the equipment had a market
value of $11,000.
Prepare the journal entry.
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>TRY IT!
Date Accounts and Explanation Debit Credit
Land 20,000 Building 170,000 Equipment 10,000 Cash 200,000 To record purchase of land, buildingand equipment.
AssetMarket Value
% of Total Value
Total Purchase Price
Cost Assigned to Each Asset
Land 22,000$ 10% * 200,000$ = 20,000$ Building 187,000 85% * 200,000$ = 170,000$ Equipment 11,000 5% * 200,000$ = 10,000$ Total 220,000$ 100% 200,000$
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Learning Objective 2
Account for depreciation using the straight-line,
units-of-production, and double-
declining-balance methods
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What Is Depreciation?
• Plant assets are recorded as assets when purchased.
• Depreciation is the process of allocating an asset’s cost to expense over its useful life.
Remember, to record depreciation, we debit Depreciation Expense
and credit Accumulated
Depreciation (a contra-asset).
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The Depreciation computation requires three main factors:
The estimated expected use from an
asset.
Total amount of cost to be allocated.
The estimated value of the asset at the end of
its useful life.
Capitalized Cost
Estimated useful life
Estimated residual value
Factors in Computing Depreciation
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Smart Touch Learning purchases a truck on
January 1, 2014
Smart Touch Learning purchases a truck on
January 1, 2014
Depreciation Methods
There are three common
depreciation methods:
• Straight-Line• Units-of-
Production• Declining-
Balance
There are three common
depreciation methods:
• Straight-Line• Units-of-
Production• Declining-
Balance
Data Item AmountCost of Truck 41,000$ Est. Residual Value 1,000 Depreciable Cost 40,000$ Est. Useful Life - Years 5 yearsEst. Useful Life - Units 100,000 miles
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Straight-Line Method
The most widely used and most
easily understood method.
Results in the same amount of depreciation in each year of the asset’s
service life.
Cost –Residual
ValueEstimated Useful Life in
Years
Annual Straight-line Depreciation
=
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Cost –Residual
Value
$41,000 – $1,000
= $8,000
=
Estimated Useful Life in Years
Annual Straight-line Depreciation
=
5
Straight-Line Method
Date Accounts and Explanation Debit Credit
Prepare the journal entry at December 31, 2014.
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Cost –Residual
Value
$41,000 – $1,000
= $8,000
=
Estimated Useful Life in Years
Annual Straight-line Depreciation
=
5
Straight-Line Method
Date Accounts and Explanation Debit Credit
12/31/14 Depreciation Expense - Truck 8,000 Accumulated Depreciation - Truck 8,000 To record depreciation on truck .
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Units-of-Production Method
• Depreciation is a function of how much an asset is USED, rather than its age.
• Less predictable than other methods.
Smart Touch Learning purchases a truck on
January 1, 2014
Smart Touch Learning purchases a truck on
January 1, 2014
Data Item AmountCost of Truck 41,000$ Est. Residual Value 1,000 Depreciable Cost 40,000$ Est. Useful Life - Years 5 yearsEst. Useful Life - Units 100,000 miles
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Units-of-Production Method
Assuming Smart Touch Learning drives the truck 20,000 miles in the first year, how much
depreciation should be recorded?
Step 1: Compute Depreciation per Unit
Depreciation per Unit
= ( Cost -Residual
Value ) ÷ Useful Life in Units
= ( $41,000 - $1,000 ) ÷ 100,000 miles = $0.40 per mile
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Units-of-Production Method
Assuming Smart Touch Learning drives the truck 20,000 miles in the first year, how much
depreciation should be recorded?
Step 2: Compute Depreciation for the Period
Depreciation =Depreciation
per Unit *Current Year
Usage = $0.40 * 20,000 miles = $8,000 Depr. Exp. - Year 1
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Double-Declining Balance Method
• An accelerated method.
• More depreciation early in an asset’s life.
• Total depreciation the same over the asset’s full life.
Smart Touch Learning purchases a truck on
January 1, 2014
Smart Touch Learning purchases a truck on
January 1, 2014
Data Item AmountCost of Truck 41,000$ Est. Residual Value 1,000 Depreciable Cost 40,000$ Est. Useful Life - Years 5 yearsEst. Useful Life - Units 100,000 miles
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 9-31
Double-Declining Balance Method
Multiply an asset’s declining book value by twice the straight-line depreciation
rate.Double-
Declining-Balance
Depreciation
= ( Cost -Accumulated Depreciation ) * ( 2 ÷
Useful Life )
= ( 41,000$ - $0 ) * ( 2 ÷ 5 years ) = 16,400$ Depreciation in Year 1
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Double-Declining Balance Method
Multiply an asset’s declining book value by twice the straight-line depreciation
rate.Double-
Declining-Balance
Depreciation
= ( Cost -Accumulated Depreciation ) * ( 2 ÷
Useful Life )
= ( 41,000$ - $0 ) * ( 2 ÷ 5 years ) = 16,400$ Depreciation in Year 1
= ( 41,000$ - $16,400 ) * ( 2 ÷ 5 years ) = 9,840$ Depreciation in Year 2
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Learning Objective 3
Journalize entries for the disposal of plant
assets
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Discarding Plant Assets
• When an asset is disposed, sold, or retired, it must be removed from the books.
• All related Accumulated Depreciation must also be removed from the books.
• Gains/Losses on disposal are recorded.
STEPS• Bring depreciation up to
date.• Remove original cost of
asset and accumulated depreciation from the books.
• Record any cash received.
• Record the difference between book value and the cash received as a gain or loss.
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Discarding Plant AssetsExample #1
On July 1, Smart Touch Learning discards equipment that cost $10,000. The accumulated depreciation on the
asset is $10,000.
Date Accounts and Explanation Debit Credit
Prepare the journal entry at July 1, 2013.
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Discarding Plant AssetsExample #1
On July 1, Smart Touch Learning discards equipment that cost $10,000. The accumulated depreciation on the
asset is $10,000.
Date Accounts and Explanation Debit Credit
7/1/13 Accumulated Depreciation--Equip. 10,000 Equipment 10,000 Discarded fully depreciated equip.
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Discarding Plant AssetsExample #2
On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation
on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
Prepare the journal entry at July 1, 2013.
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Discarding Plant AssetsExample #2
On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation
on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
First, we have to update the depreciation.
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Discarding Plant AssetsExample #2
On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation
on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
7/1/13 Depreciation Expense--Equip. 500 Accumulated Depreciation--Equip. 500 To record depreciation.$1,000 * 6/12 = $500
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Discarding Plant AssetsExample #2
On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation
on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
Second, record the disposal.
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Discarding Plant AssetsExample #2
On July 1, Smart Touch Learning discards equipment that cost $10,000. As of December 31 the previous year, the accumulated depreciation
on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
7/1/13 Accumulated Depreciation--Equip. 8,500 Loss on Disposal 1,500 Equipment 10,000 To record disposal of equipment.
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Discarding Plant AssetsExample #3
On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
Prepare the journal entries at July 1, 2013.
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Discarding Plant AssetsExample #3
On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
First, update depreciation.
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Discarding Plant AssetsExample #3
On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
7/1/13 Depreciation Expense--Equip. 500 Accumulated Depreciation--Equip. 500 To record depreciation.$1,000 * 6/12 = $500
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Discarding Plant AssetsExample #3
On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
Second, record the sale.
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Discarding Plant AssetsExample #3
On July 1, Smart Touch Learning sells equipment for $4,000. The equipment cost
$10,000. As of December 31 the previous year, the accumulated depreciation on the asset was $8,000. Annual depreciation per year is $1,000.
Date Accounts and Explanation Debit Credit
7/1/13 Cash 4,000 Accumulated Depreciation--Equip. 8,500 Gain on Sale of Equipment 2,500 Equipment 10,000 To record sale of equipment.
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Learning Objective 4
Account for natural resources
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Natural Resources
• Assets that come from the earth and are consumed.
• The value of the “reserves” that a company owns/controls is a long-term asset.
Includes:• Iron ore• Oil• Natural Gas• Coal• Timber• Diamonds• Gold and silver
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Natural Resources
• As the resources are extracted, Depletion Expense is recorded.
• A contra-asset Accumulated Depletion is also recorded.
• Steps (similar to Units-of-Production)1. Compute Depletion per Unit (based on
estimated reserves)
2. Compute Depletion for the period (based on actual extraction)
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Natural Resources
A company owns oil reserves that cost $700,000 and is estimated to contain 70,000
barrels of oil. During the year, 3,000 barrels of oil are extracted.
Date Accounts and Explanation Debit Credit
Prepare the journal entry for Depletion Expense.
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Natural Resources
Date Accounts and Explanation Debit Credit
Step 1: Compute Depletion per Unit.
Step 1: Compute Depletion per Unit
Depletion per Unit = ( Cost -Residual
Value ) ÷ Estimated Reserves
= ( $ 700,000 - $0 ) ÷ 70000 barrels = 10.00$ per barrel
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Natural Resources
Date Accounts and Explanation Debit Credit
Step 2: Compute Depletion for the Period.
Step 2: Compute Depletion for the Period
Depletion =Depletion per
Unit *Current Year
Extraction = $ 10.00 * 3,000 barrels = 30,000.00$ Depletion Expense
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Natural Resources
Date Accounts and Explanation Debit Credit
Prepare the journal entry for Depletion Expense.
Step 2: Compute Depletion for the Period
Depletion =Depletion per
Unit *Current Year
Extraction = $ 10.00 * 3,000 barrels = 30,000.00$ Depletion Expense
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Natural Resources
Date Accounts and Explanation Debit Credit
Dec. 31 Depletion Expense--Oil 30,000 Accumulated Depletion--Oil 30,000 To record depletion.
Step 2: Compute Depletion for the Period
Depletion =Depletion per
Unit *Current Year
Extraction = $ 10.00 * 3,000 barrels = 30,000.00$ Depletion Expense
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Date Accounts and Explanation Debit Credit
>TRY IT!
Prepare the journal entry.
Amplify Petroleum holds reserves of oil representing an estimated 100 million barrels. The cost of those reserves was $80,000,000. If Amplify Petroleum extracts and sells 20 million barrels in
2015, what is the depletion for the year?
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>TRY IT!
Date Accounts and Explanation Debit Credit
Dec. 31 Depletion Expense--Oil 16,000,000 Accumulated Depletion--Oil 16,000,000 To record depletion for the year.20,000,000 barrels x $.80 per barrel
Amplify Petroleum holds reserves of oil representing an estimated 100 million barrels. The cost of those reserves was $80,000,000. If Amplify Petroleum extracts and sells 20 million barrels in
2015, what is the depletion for the year?
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Learning Objective 5
Account for Intangible Assets
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Intangible Assets
• Assets that have no physical substance.
• Usual convey rights to the owner.
• Recorded at cost.• Research and
development costs are NOT included.
Includes• Patents• Copyrights• Trademarks• Franchise
Agreements• Licenses• Goodwill
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Intangible Assets
• As intangible assets “expire,” they must be “amortized.”
• Amortization expense is recorded:– Based on the straight-line method– Use the shorter of the useful life or the legal
life– Only for intangible assets with definite life
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Intangible Assets
• There is no contra-asset account used with the amortization process.– The intangible asset is credited directly.– Each year the asset’s book value will
decrease by the amount of the amortization.
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Date Accounts and Explanation Debit Credit
>TRY IT!
Prepare the journal entry.
On January 1, Orange Manufacturing paid $40,000 for a patent. It has a legal life of 20 years. The patent is expected to give legal
protection for 8 years.
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Date Accounts and Explanation Debit Credit
Dec. 31 Amortization Expense--Patent 5,000 Patent 5,000 To record amortization of patent.
>TRY IT!On January 1, Orange Manufacturing paid $40,000 for a patent. It has a legal life of 20 years. The patent is expected to give legal
protection for 8 years.
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Learning Objective 6
Use the asset turnover ratio to
evaluate business performance
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Asset Turnover Ratio
• Used to measure how well a company is using its assets to generate sales revenue.
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Learning Objective 7
Journalize entries for the exchange of
plant assets (Appendix 9A)
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Exchange Plant Assets
• An exchange includes aspects of a sale and a disposal.
• Special accounting is required if the exchange transaction has commercial substance.– i.e.; the future cash flows will change as a
result of the exchange.
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Exchange Plant AssetsIf an exchange lacks
commercial substance, the new asset is recorded at the book value of the
asset that is given up, plus/minus any cash exchanged as
part of the transaction.
An auto dealer trades a blue sedan to another
auto dealer for a similar sedan in black to satisfy a customer’s preference.
There is no commercial substance related to this transaction. The future
cash flows do not change.
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Exchange Plant Assets
If an exchange has commercial
substance, the new asset is recorded at its market value on
the date of the exchange.
Gains or losses may have to be recorded.
On December 31, Smart Touch Learning exchanges used equipment and $2,000
cash for new equipment.
The old equipment has a cost of $10,000 and accumulated
depreciation of $9,000.
The new equipment has a market value of $8,000.
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Date Accounts and Explanation Debit Credit
Exchange Plant Assets
1. Take the old equipment off the books.
2. Record the cash payment.
3. Record the new asset.
4. Record any gain or loss.
Prepare the journal entry.
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Exchange Plant Assets
1. Take the old equipment off the books.
2. Record the cash payment.
3. Record the new asset.
4. Record any gain or loss.
Date Accounts and Explanation Debit Credit
Dec. 31 Equipment (new) 8,000 Accumulated Depreciation--Equip. 9,000 Equipment (old) 10,000 Cash 2,000 Gain on Exchange 5,000 Exchanged old equipment for new.
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>TRY IT!Area Salvage Company purchased equipment
for $10,000. Over the asset’s life, they recorded accumulated depreciation of $8,000. They
exchange the old equipment and $4,000 for new equipment with a market value of $5,000.
Date Accounts and Explanation Debit Credit
Prepare the journal entry.
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>TRY IT!Area Salvage Company purchased equipment
for $10,000. Over the asset’s life, they recorded accumulated depreciation of $8,000. They
exchange the old equipment and $4,000 for new equipment with a market value of $5,000.
Date Accounts and Explanation Debit Credit
Equipment (new) 5,000 Accumulated Depreciation--Equip. 8,000 Loss on Exchange 1,000 Equipment (old) 10,000 Cash 4,000 To exchange old equipment for new.
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