Question

Equipment costing $b0000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $100000. An insurance check for $300000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a
a. credit to the Equipment account of $160000.
b. credit to the Accumulated Depreciation account for $100000.
c. gain on disposal of $140000.
d. gain on disposal of $40000.

Answer 1

Answer: c. gain on disposal of $140000.

Explanation:

The cost of the equipment is $260,000.

When the fire occurred, the book value of the equipment was:

= Cost of equipment - Accumulated depreciation

= 260,000 - 100,000

= $160,000

A check of $300,000 was received from insurance. The gain on disposal is:

= Replacement cost - book value

= 300,000 - 160,000

= $140,000

This amount will be credited to the Gain on Disposal account because an increase is credited.