Conservative Company purchased a warehouse on January 1, 2011, for $400,000. At the time of purchase, Conservative anticipated that the warehouse would be used to facilitate the expansion of its product lines. The warehouse is being depreciated over 20 years and is expected to have a residual value of $50,000. At the beginning of 2016, the company decided that the warehouse would no longer be used and should be sold for its carrying amount. At the end of 2016, the warehouse still had not been sold and its net realizable value was estimated to be only $260,000.
a. Calculate the carrying amount of the warehouse on January 1, 2016.
b. Prepare all the journal entries that Conservative should make during 2016 related to the warehouse.
c. If Conservative sells the warehouse in 2017 for $220,000, what entry would be made for the sale?
d. During 2016, the financial vice-president expressed concern that, if Conservative put the building up for sale, the company might have to report a loss, and he did not want to reduce 2016 earnings. He wanted to continue treating the warehouse as an operating asset. How would the 2016 and 2017 financial statements be different if the warehouse were still treated as an operating asset during 2016? From a shareholder’s perspective, do you think the treatment makes any difference? Explain.

  • CreatedJune 11, 2015
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