Garland Company purchased construction equipment on July 1, 2001, for $800,000. The equipment was expected to have a useful life of five years and a residual value of $50,000. On June 30, 2004, Garland no longer needed the equipment and sold it for $311,000. Garland’s accounting year ends on December 31. The company uses the straight-line depreciation method.

Required

A. Information about this equipment must be entered into the accounting system on July 1, 2001; December 31, 2001; December 31, 2002; December 31, 2003; and June 30, 2004. Show how that information should be entered, using the format shown in this chapter.

B. Why was a gain (or loss) recorded at the date of disposal? What caused this to occur? Does a loss mean that the company has been negligent in selling the asset? Does a gain on sale mean that the company has been skillful in selling the asset? Explain.

C. Calculate the cumulative net effect that all transactions involving the equipment had on Garland’s pretax income from 2001 through 2004. Also, calculate the cumulative net effect that all transactions involving the equipment had on cash flows for this period. Explain the relationship between (1) the effect on pretax income and (2) the effect on cash flows.