Answered Essay: 4.General Motors acquired equipment used in its administrative activities for $ 100, 000 on January

4.General Motors acquired equipment used in its administrative activities for $ 100, 000 on January
1, Year 4. The equipment had an expected useful life of four years and zero salvage value. GM
calculates depreciation using the straight-line method over the remaining expected useful life in
all cases. On 12/31, year 4, after recognizing depreciation for the year, GM learns that new
equipment now offered on the market makes the equipment GM purchased partially obsolete.
The market value is now $ 60, 000. The expected useful life does not change. On 12/31, year 5,
the market value of the equipment is $ 48, 000. GM sells the equipment on 1/1, year 7, for
$26,000.

a. Assume for this part of the problem that GM accounts for equipment using acquisition
adjusted for depreciation and impairment losses. Using the analytical framework
described in the chapter, indicate the effect of the following events on the balance
sheet and income statement.
I. Acquisition of the equipment for cash on 1/1, Year 4
ii. Depreciation in Year 4
iii. Impairment loss for Year 4
iv. Depreciation for Year 5
V. Depreciation for Year 6
vi. Sale of the equipment on 1/1, Year 7

B. Assume for this part of the problem that GM accounts for equipment using current
mar ket values adjusted for depreciation and impairment losses. Using the analytical
framework described in the chapter, indicate the effect of the following events on the
balance sheet and income statement.
I. Acquisition of the equipment for cash on 1/1, Year 4
ii. Depreciation in Year 4
iii. Impairment loss for Year 4
iv. Depreciation for Year 5
V. Recognition of unrealized holding gain or loss for Year 5
vi. Depreciation for Year 6
vii. Recognition of unrealized holding gain or loss in Year 6
viii. Sale of the equipment on 1/1, Year 7

Expert Answer

 

Solution:

1) Indicating the Effect of the Following Events on the Balance Sheet and Income Statement by Using Acquisition Values:

I)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Equipment +$100,000
Cash -$100,000
General Journal Debit Credit
Equipment $100,000
Cash $100,000

II)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$25,000 Depreciation Expense -$25,000
General Journal Debit Credit
Depreciation Expense $25,000
Accumulated Depreciation $25,000

III)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Equipment -$15,000 Impairment Loss -$15,000
General journal Debit Credit
Impairement Loss $15,000
Equipment $15,000

IV)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$20,000 Depreciation Expense -$20,000
General Journal Debit Credit
Depreciation Expense $20,000
Accumulated Depreciation $20,000

V)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$20,000 Depreciation Expense -$20,000
General Journal Debit Credit
Depreciation Expense $20,000
Accumulated Depreciation $20,000

VI)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Cash +$26,000 Gain on Sale of Equipment +$6,000
Equipment -$85,000
Accumulated Deprecciation +$65,000
General Journal Debit Credit
Cash $26,000
Accumulated Depreciation $65,000
Equipment $85,000
Gain on Sale of Equipment $6,000

b) Indicate the Following Events on the Balance Sheet and Income Statement by using Current Market Values:

I)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Equipment -$100,000
Cash +$100,000
General Journal Debit Credit
Equipment $100,000
Cash $100,000

II)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$25,000 Depreciation Expense -$25,000
General Journal Debit Credit
Depreciation Expense $25,000
Accumulated Depreciation $25,000

III)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Equipment -$15,000 Impairment Loss -$15,000
General journal Debit Credit
Impairement Loss $15,000
Equipment $15,000

IV)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$20,000 Depreciation Expense -$20,000
General Journal Debit Credit
Depreciation Expense $20,000
Accumulated Depreciation $20,000

V)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$8,000 Depreciation Expense -$8,000
General Journal Debit Credit
Depreciation Expense $8,000
Accumulated Depreciation $8,000

VI)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Accumulated Depreciation -$24,000 Depreciation Expense -$24,000
General Journal Debit Credit
Depreciation Expense $24,000
Accumulated Depreciation $24,000

VII)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Equipment +$2,000 Gain on Change in Equipment Fair Value +$2,000
General Journal Debit Credit
Equipment $2,000
Gain on Change in Equipment Fair Value $2,000

VIII)

Assets = Liabilities + Shareholder’s Equity
CC AOIC RE
Cash +$26,000 Gain on Sale of Equipment +$6,000
Equipment -$85,000
Accumulated Deprecciation +$65,000
General Journal Debit Credit
Cash $26,000
Accumulated Depreciation $65,000
Equipment $85,000
Gain on Sale of Equipment $6,000
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