(Dispositions, includingcondemnation, demolition, and trade-in) Presented below
ID: 2457530 • Letter: #
Question
(Dispositions, includingcondemnation, demolition, and trade-in) Presented below is a schedule ofproperty dispositions for Frank Thomas Co accumulated cash fair market nature of cost depreciation proceeds value disposition land 40,000 -- 31,000 31,000 condemnation building 15,000 -- 3,600 -- demolition warehouse 70,000 11,000 74,000 74,000 destruction by fire machine 8,000 3,200 900 7,200 trade-in furniture 10,000 7,850 -- 3,100 contribution automobile 8,000 3,460 2,960 2,260 sale The following additional information isavailable: Land On Feb 15, a condemnation award wasreceived as consideration for unimproved land held premarily as an investment, and on Mar31, another parcel of unimproved land to be held as an investment was purchased at a costof $35,000 Building On April 2, land and building werepurchased at a total cost of $75,000, of which 20% was alloted to the building on thecorporate books. The real estate was acquired with theintentio of demolishing the building, and this wasaccomplished during the month of Nov . Cash proceeds received in Nov represent the netproceeds from demolition of the building. Warehouse On June 30, the warehouse was destroyedby fire. The warehouse was purchased Jan 2, 2004 and had depreciated $11,000. OnDec 27, the insurance proceeds and other funds were usedto purchase a replacement warehouse at acost of $90,000 Machine On Dec 26, the machine was exchangedfor another machine having a fair market value of $6,300 and cash of $900 wasreceived. (the exchange lacks commercial substance) Furniture On Aug 15, frniture was contributed toa qualified charitable organiztion. No other contributions were made or pledgedduring the year Automobile On Nov 3, the automobile was sold toOzzie Guillen, a stockholder Instructions: Indicate how these items would bereported on the income satement of Frank Thomas Co. (Dispositions, includingcondemnation, demolition, and trade-in) Presented below is a schedule ofproperty dispositions for Frank Thomas Co accumulated cash fair market nature of cost depreciation proceeds value disposition land 40,000 -- 31,000 31,000 condemnation building 15,000 -- 3,600 -- demolition warehouse 70,000 11,000 74,000 74,000 destruction by fire machine 8,000 3,200 900 7,200 trade-in furniture 10,000 7,850 -- 3,100 contribution automobile 8,000 3,460 2,960 2,260 sale The following additional information isavailable: Land On Feb 15, a condemnation award wasreceived as consideration for unimproved land held premarily as an investment, and on Mar31, another parcel of unimproved land to be held as an investment was purchased at a costof $35,000 Building On April 2, land and building werepurchased at a total cost of $75,000, of which 20% was alloted to the building on thecorporate books. The real estate was acquired with theintentio of demolishing the building, and this wasaccomplished during the month of Nov . Cash proceeds received in Nov represent the netproceeds from demolition of the building. Warehouse On June 30, the warehouse was destroyedby fire. The warehouse was purchased Jan 2, 2004 and had depreciated $11,000. OnDec 27, the insurance proceeds and other funds were usedto purchase a replacement warehouse at acost of $90,000 Machine On Dec 26, the machine was exchangedfor another machine having a fair market value of $6,300 and cash of $900 wasreceived. (the exchange lacks commercial substance) Furniture On Aug 15, frniture was contributed toa qualified charitable organiztion. No other contributions were made or pledgedduring the year Automobile On Nov 3, the automobile was sold toOzzie Guillen, a stockholder Instructions: Indicate how these items would bereported on the income satement of Frank Thomas Co.Explanation / Answer
The following accounting treatment appears appropriatefor these items:
Land—The loss onthe condemnation of the land of $9,000 ($40,000 – $31,000)should be reported as an extraordinary item on the incomestatement. If condemnations are either usual or recurring, then anordinary or unusual classification is more appropriate. The $35,000land purchase has no income statement effect.
Building—There isno recognized gain or loss on the demolition of the building. Theentire purchase cost ($15,000), decreased by the demolitionproceeds ($3,600), is allocated to land.
Warehouse—The gainon the destruction of the warehouse should be reported as anextraordinary item, assuming that it is unusual and infrequent. Thegain is computed as follows:
Insurance proceeds
$74,000
Deduct: Cost
$70,000
Less: Accumulateddepreciation
11,000
59,000
Realized gain
$15,000
Some contend that a portion of this gain should bedeferred because the proceeds are reinvested in similar assets. Wedo not believe such an approach should be permitted. Deferral ofthe gain in this situation is not permitted underGAAP.
Machine—Therecognized gain on the transaction would be computed asfollows:
Fair market value of old machine
$7,200
Deduct: Book value of old machine
Cost
$8,000
Less: Accumulateddepreciation
3,200
4,800
Total gain
$2,400
Total gain recognized= $2,400 X
$900
= $300
$900 + $6,300
The gain deferred is $2,100 ($2,400 – $300)
This gain would probably be reported in other revenuesand gains. It might be reported as an unusual item if the companybelieves that such a situation occurs infrequently and if material.The cost of the new machine would be capitalized at$4,200.
Fair market value of new machine
$6,300
Less: Gain deferred ($2,400 – $300)
2,100
Cost of new machine
$4,200
Furniture—Thecontribution of the furniture would be reported as a contributionexpense of $3,100 with a related gain on disposition of furnitureof $950: $3,100 – ($10,000 – $7,850). The contributionexpense and the related gain may be netted, ifdesired.
Automobile—Theloss on sale of the automobile of $1,580: [$2,960 – ($8,000– $3,460)] should probably be reported in the other expensesor losses section. It might be reported as an unusual item if thecompany believes that such a situation occursinfrequently.
Insurance proceeds
$74,000
Deduct: Cost
$70,000
Less: Accumulateddepreciation
11,000
59,000
Realized gain
$15,000
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