Motors (GM) 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 Dec...

Effect of Valuation Method for Nonmonetary Asset on Bala ...

Motors (GM) acquired equipment used in its administrative activities for $100,000 on January 1, Year 4. The

Question:

Motors (GM) 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 . GM calculates depreciation using the straight-line method over the remaining expected useful life in all cases. On December 31, Year 4, after recognizing depreciation for the year, GM learns that new equipment now offered on the market makes the equipment that GM purchased partially obsolete. The market value of the equipment on
December 31, Year 4, reflecting this obsolescence, is $60,000. The expected useful life does not change. On December 31, Year 5, the market value of the equipment is $48,000. GM sells the equipment on January 1, Year 7, for $26,000.
Required
Ignore income taxes.
a. Assume for this part that GM accounts for the equipment using acquisition cost adjusted for depreciation and impairment losses. Using the analytical framework discussed in the chapter, indicate the effect of the following events on the and income statement:
(1) Acquisition of the equipment for cash on January 1, Year 4.
(2) Depreciation for Year 4.
(3) Impairment loss for Year 4.
(4) Depreciation for Year 5.
(5) Depreciation for Year 6.
(6) Sale of the equipment on January 1, Year 7.
b. Assume for this part that GM accounts for the equipment using current market values adjusted for depreciation and impairment losses. Using the analytical framework discussed in the chapter, indicate the effect of the following events on the and income statement.
(1) Acquisition of the equipment for cash on January 1, Year 4.
(2) Depreciation for Year 4.
(3) Impairment loss for Year 4.
(4) Depreciation for Year 5.
(5) Recognition of unrealized holding gain or loss for Year 5.
(6) Depreciation for Year 6.
(7) Recognition of unrealized holding gain or loss for Year 6.
(8) Sale of the equipment on January 1, Year 7.
c. After selling the equipment, why is retained earnings on January 1, Year 7, equal to a negative $74,000 in both cases, despite showing a different pattern of expenses, gains, and losses over time?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...