1. 2.
14 Effect of Valuation Method for Nonmonetary Asset on Balance Sheet and
Income Statement. Assume Southern Copper Corporation (SCCO) acquired
mining equipment for $100,000 cash on January 1, 2016. The equipment had an
expected useful life of four years and zero salvage value. SCCO calculates
depreciation using the straight-line method over the remaining expected useful
life in all cases. On December 31, 2016, after recognizing depreciation for the
year, SCCO learns that new equipment now offered on the market makes the
purchased equipment partially obsolete. The market value of the equipment on
December 31, 2016, reflecting this obsolescence, is $60,000. The expected
useful life does not change. On December 31, 2017, the market value of the
equipment is $48,000. SCCO sells the equipment on January 1, 2019, for
$26,000.
Required
Ignore income taxes.
Assume for this part that SCCO accounts for the equipment using historical
cost adjusted for depreciation and impairment losses. Using the analytical
framework discussed in the chapter, indicate the effects of the following
events on the balance sheet and income statement.
(1) Acquisition of the equipment for cash on January 1, 2016
The said equipment that was purchased that was worth $100,000
will likely to increase the said assets since cash is spent, and the cash will be
reduced by the same amount
Assets Liabilities Contribute Accumulated Other Retained
d Capital Comprehensive Income Earnings
January 01,
2016
Equipment $100,000 $0
Cash ($100,000 $0 $0
)
Total 0 $0 $0 $0 $0
Journal Entry
Date Accounts and Debit Credit
Explanation
January 01,2016 Equipment $100,000
Cash $100,000
To record purchase of equipment worth $100,000
(2) Depreciation for 2016
Now I would say here for 2016 the depreciation would be $25,000
that is being reduced from the retained earnings since accumulated
depreciation will be changed from assets so as a result they will be reduced
by the same amount.
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2016
Accumulated ($25,000) $0 $0
Depreciation
Depreciation ($25,000)
Total ($25,000) $0 $0 $0 ($25,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Depreciation $25,000
Accumulated $25,000
Depreciation
To record purchase of equipment worth $25,000
(3) Impairment loss for 2016
The Impairment loss of $15,000 will be reduced from retained earnings
since it reduces the value of assets, equipment will most likely be reduced by
the same amount.
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2016
Impairment $0 $0
loss
Equipment (15,000) (15,000)
Total ($15,000) $0 $0 $0 (15,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Impairment loss $15,000
Equipment $15,000
To record purchase of equipment worth $15,000
(4) Depreciation for 2017
The depreciation of $20,000 will be reduced from retained earnings since
accumulated depreciation will be charged from assets, they will also be reduced
by the same amount.
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2017
Accumulated ($20,000) $0 $0
Depreciation
Depreciation ($20,000)
Total ($20,000) $0 $0 $0 ($20,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Depreciation $20,000
Accumulated $20,000
Depreciation
To record purchase of equipment worth $20,000
(5) Depreciation for 2018
The depreciation of $20,000 will be reduced from the retained earnings
Since accumulated depreciation will be changed from assets, and most likely
be reduced by the same amount
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2018
Accumulated ($20,000) $0 $0
Depreciation
Depreciation ($20,000)
Total ($20,000) $0 $0 $0 ($20,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Depreciation $20,000
Accumulated $20,000
Depreciation
To record purchase of equipment worth $20,000
(6) Sale of the equipment on January 1, 2019
Contributed Accumulated Other
Assets Liabilities Capital Comprehensive Retained Earnings
Income
Cash $26,000 $0 $0
Accumulated $65,000
Depreciation
Equipment ($85,000)
Gain on sale $6,000
of Equipment
$6,000 $0 $0 $0 $6,000
Journal Entry
Date Accounts and Debit Credit
Explanation
January 1, 2019 Cash $26,000
Accumulated $65,000
Depreciation
Equipment $85,000
Gain on sale of $6,000
Equipment
To Record sale of Equipment
2. Assume that SCCO accounts for the equipment using current fair market values
adjusted for depreciation and impairment losses (with changes in fair market
values recognized in net income). Using the analytical framework discussed in
the chapter, indicate the effect of the following events on the balance sheet and
income statement.
(1) Acquisition of the equipment for cash on January 1, 2016
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2016
Equipment ($100,000) $0 $0
Cash $0
Total $0 $0 $0 $0 $0
Journal Entry
Date Accounts and Debit Credit
Explanation
January 01,2016 Equipment $100,000
Cash $100,000
To record purchase of equipment worth $100,000
(2) Depreciation for 2016
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2016
Accumulated ($25,000) $0 $0
Depreciation
Depreciation ($25,000)
Total ($25,000) ($25,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Depreciation $25,000
Accumulated $25,000
Depreciation
To record depreciation of $25,000
(3) Impairment loss for 2016
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2016
Impairment $0 $0
loss
Equipment (15,000) (15,000)
Total ($15,000) $0 $0 $0 (15,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2016 Impairment loss $15,000
Equipment $15,000
To record impairment loss of $15,000
(4) Depreciation for 2017
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2017
Accumulated ($20,000) $0 $0
Depreciation
Depreciation ($20,000)
Total ($20,000) $0 $0 $0 ($20,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2017 Depreciation $20,000
Accumulated $20,000
Depreciation
To record deprecation of $20,000
(5) Recognition of unrealized holding gain or loss for 2017
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2018
Equipment ($8,000)
Gain on ($8,000)
sale of
Equipment
Total ($8,000) $0 $0 $0 ($8,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2017 Equipment $8,000
Accumulated $8,000
Depreciation
To record unrealized holding gain, due to change in market value, of $8,000
(6) Depreciation for 2018
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2018
Accumulated ($24,000) $0 $0
Depreciation
Depreciation ($24,000)
Total ($24,000) $0 $0 $0 ($24,000)
Journal Entry
Date Accounts and Debit Credit
Explanation
2018 Depreciation $24,000
Accumulated $24,000
Depreciation
To record depreciation of $24,000
(7) Recognition of unrealized holding gain or loss for 2018
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2018
Equipment $2,000
Gain on sale of $2,000
equipment
Total ($8,000) $0 $0 $0 $2,000
Journal Entry
Date Accounts and Debit Credit
Explanation
2018 Equipment $2,000
Unrealized holding $2,000
gain
To record unrealized holding gain, due to change in market value, of $2,000
(8) Sale of the equipment on January 1, 2019
Assets Liabilities Contributed Accumulated Other Retained
Capital Comprehensive Income Earnings
2018
Cash $2,000 $0 $0
Accumulated $69,000 .
Depreciation
Equipment ($95,000)
Total $0 $0 $0 $0 $0
Journal Entry
Date Accounts and Debit Credit
Explanation
January 01,2019 Cash $26,000
Accumulated $69,000
Depreciation
Equipment $95,000
To record sale of equipment worth $20,000
3. After the equipment is sold, why is retained earnings on January 1, 2019, equal
to a negative $74,000 in both cases despite having shown a different pattern of
expenses, gains, and losses over time?
Retained earnings on January 1, 2019 is equal to a negative $74,000 in said both cases despite having
show a different pattern of expenses is because of the historical equipment cost and that is $100,000
and when it was sold for a depreciated cost amount of $26,000 they had to offset the amount of the
retained earnings that was deducted from selling the said equipment.