Financial Accounting Quiz: Disposal Of Ppe
8 questions · exam conditions
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Disposal Of PpeQuestion 1 of 8

Meridian Corporation sold equipment with an original cost of $120,000 and accumulated depreciation of $85,000 for $28,000 cash. The equipment had been depreciated using the straight-line method over 8 years with no salvage value. At the time of sale, the equipment was 6 years old. What is the impact on net income from this transaction?

Decrease of $7,000
Decrease of $17,000
Increase of $7,000
Increase of $17,000
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Financial Accounting Quiz

Financial Accounting Quiz: Disposal Of Ppe

Practice Disposal Of Ppe in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Disposal Of Ppe, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Meridian Corporation sold equipment with an original cost of $120,000 and accumulated depreciation of $85,000 for $28,000 cash. The equipment had been depreciated using the straight-line method over 8 years with no salvage value. At the time of sale, the equipment was 6 years old. What is the impact on net income from this transaction?

  1. Decrease of $7,000 (correct answer)
  2. Decrease of $17,000
  3. Increase of $7,000
  4. Increase of $17,000
Explanation: The book value of the equipment is $120,000 - $85,000 = $35,000. The equipment was sold for $28,000, resulting in a loss of $35,000 - $28,000 = $7,000. A loss decreases net income by 7,000.ChoiceBincorrectlyusestheannualdepreciationamount(7,000. Choice B incorrectly uses the annual depreciation amount (15,000) plus the gain/loss. Choice C treats the loss as a gain. Choice D treats the loss as a gain and uses an incorrect calculation.

Question 2

Apex Industries retired a machine that originally cost $80,000 with accumulated depreciation of $72,000. The machine was scrapped with no proceeds received. Prior to retirement, Apex discovered that depreciation expense of $3,000 had been omitted in the previous year but not yet recorded. What total amount should be recorded as a loss on retirement?

  1. $5,000 (correct answer)
  2. $8,000
  3. $11,000
  4. $3,000
Explanation: First, the omitted depreciation must be recorded, increasing accumulated depreciation to $72,000 + $3,000 = $75,000. The adjusted book value is $80,000 - $75,000 = $5,000. Since no proceeds were received, the entire book value of $5,000 becomes a loss on retirement. Choice B uses the original book value without the adjustment. Choice C adds the omitted depreciation to the unadjusted book value. Choice D only considers the omitted depreciation.

Question 3

Omega Industries sold equipment on installment for $60,000, receiving $20,000 down and a $40,000 note receivable due in two years. The equipment had an original cost of $85,000 and accumulated depreciation of $32,000. Transaction costs of $2,000 were paid by Omega. What is the net effect on cash from this disposal?

  1. $22,000 increase
  2. $20,000 increase
  3. $58,000 increase
  4. $18,000 increase (correct answer)
Explanation: When analyzing equipment disposals, focus on the actual cash movements rather than the total transaction value. The key is distinguishing between cash received and the overall sale price. In this disposal, Omega receives $20,000 in cash immediately (the down payment) but must pay $2,000 in transaction costs. The $40,000 note receivable represents a promise of future cash, not current cash flow. Therefore, the net cash effect is: $\text{Cash received} - \text{Transaction costs} = \20,000 - $2,000 = $18,000 The equipment's book value ($85,000 cost - $32,000 accumulated depreciation = $53,000) and any resulting gain or loss don't directly affect the cash calculation. Answer D (18,000increase)correctlyreflectsonlytheimmediatecashimpact.AnswerB(18,000 increase) correctly reflects only the immediate cash impact. Answer B (20,000 increase) ignores the transaction costs that reduce net cash received. Answer A (22,000increase)incorrectlyaddsthetransactioncoststothedownpaymentinsteadofsubtractingthem.AnswerC(22,000 increase) incorrectly adds the transaction costs to the down payment instead of subtracting them. Answer C (58,000 increase) represents the total selling price minus transaction costs ($60,000 - $2,000), but this mistakenly treats the note receivable as immediate cash. Remember: when calculating cash effects from asset disposals, include only actual cash inflows and outflows occurring at the transaction date. Notes receivable, while valuable, represent future cash flows and shouldn't be counted in current period cash calculations. Always subtract any costs paid to complete the transaction.

Question 4

Atlas Corporation inadvertently sold equipment that was still subject to a capital lease obligation of $18,000. The equipment had an original cost of $95,000, accumulated depreciation of $55,000, and was sold for $52,000. Atlas must pay the remaining lease obligation. What is the total impact on Atlas's net income from this transaction?

  1. Increase of $12,000
  2. Decrease of $6,000 (correct answer)
  3. Decrease of $18,000
  4. Increase of $34,000
Explanation: Book value of equipment is $95,000 - $55,000 = $40,000. Sale proceeds of $52,000 create a gain of $12,000. However, Atlas must pay the lease obligation of $18,000, which reduces cash and creates an expense. Net impact on income: $12,000 gain - $18,000 expense = $6,000 decrease to net income. Choice A ignores the lease obligation payment. Choice C only considers the lease obligation expense. Choice D incorrectly adds amounts.

Question 5

Vega Inc. sold equipment for $45,000 on July 1, 2023. The equipment was purchased for $80,000 on January 1, 2021, and was being depreciated over 8 years with no salvage value using the straight-line method. Vega's fiscal year ends December 31. What adjusting entry is needed before recording the sale?

  1. Debit Depreciation Expense $25,000; Credit Accumulated Depreciation $25,000
  2. Debit Depreciation Expense $10,000; Credit Accumulated Depreciation $10,000
  3. Debit Depreciation Expense $5,000; Credit Accumulated Depreciation $5,000 (correct answer)
  4. No adjusting entry needed
Explanation: When you encounter asset disposal questions, remember that depreciation must be current through the disposal date before recording any sale transaction. This ensures accurate calculation of book value and gain or loss. Let's calculate the required depreciation adjustment. The equipment cost $80,000 with an 8-year useful life and no salvage value, giving annual straight-line depreciation of $\frac{\80,000}{8} = $10,000 per year, or \frac{$10,000}{12} = $833.33 per month. From the purchase date (January 1, 2021) through December 31, 2022, Vega recorded two full years of depreciation totaling 20,000. However, the sale occurs on July 1, 2023, meaning six additional months of depreciation (January through June 2023) must be recorded: $$6 \times \833.33 = $5,000$$. This adjustment brings depreciation current before the sale. Answer A (25,000)incorrectlycalculates2.5yearsoftotaldepreciationasifitwereallrecordedinoneentry,ignoringthatprioryearswerealreadyrecorded.AnswerB(25,000) incorrectly calculates 2.5 years of total depreciation as if it were all recorded in one entry, ignoring that prior years were already recorded. Answer B (10,000) mistakenly records a full year of 2023 depreciation despite the equipment being sold mid-year. Answer D is wrong because depreciation adjustments are always required when assets are disposed of during the accounting period to ensure accurate financial reporting. Study tip: For asset disposal problems, always update depreciation first by calculating the exact time period from the last recorded depreciation to the disposal date. This systematic approach prevents timing errors and ensures you capture partial-year depreciation correctly.

Question 6

Delta Corp. exchanged old delivery trucks plus $15,000 cash for new trucks. The old trucks had an original cost of $90,000, accumulated depreciation of $60,000, and a fair value of $35,000. The new trucks had a fair value of $50,000. Assuming this is a commercial substance exchange, what gain or loss should Delta recognize?

  1. Loss of $5,000
  2. Gain of $5,000 (correct answer)
  3. Gain of $20,000
  4. No gain or loss
Explanation: When you encounter asset exchanges with commercial substance, you need to recognize gains or losses based on the difference between an asset's book value and fair value. Commercial substance means the exchange will significantly change the company's future cash flows. Here's how to solve this step-by-step. First, calculate the book value of the old trucks: original cost of $90,000 minus accumulated depreciation of $60,000 equals $30,000. Next, compare this book value to the fair value of $35,000. Since the fair value exceeds the book value by $5,000, Delta recognizes a $5,000 gain. The cash payment and new truck value are irrelevant for determining gain or loss on the old asset—you only need the old truck's book value versus its fair value. Looking at the wrong answers: Choice A (5,000loss)incorrectlysubtractsfairvaluefrombookvalueinsteadofthereverse.ChoiceC(5,000 loss) incorrectly subtracts fair value from book value instead of the reverse. Choice C (20,000 gain) mistakenly uses accumulated depreciation ($60,000 - $30,000 book value) rather than the fair value comparison. Choice D (no gain or loss) would only apply to exchanges lacking commercial substance, where gains are typically deferred. Remember this pattern: for exchanges with commercial substance, always calculate gain or loss as fair value minus book value of the surrendered asset. The key trap is getting distracted by the cash paid or received—focus solely on comparing what you gave up (book value) to what it was actually worth (fair value).

Question 7

Stellar Corp. traded in old manufacturing equipment plus paid $25,000 cash for new equipment. The old equipment cost $100,000, had accumulated depreciation of $70,000, and a trade-in allowance of $35,000. The new equipment's list price was $60,000. Assuming the exchange lacks commercial substance, what amount should be recorded as the cost of the new equipment?

  1. $35,000
  2. $60,000
  3. $55,000 (correct answer)
  4. $30,000
Explanation: When you encounter equipment exchanges, the key decision point is whether the transaction has commercial substance. This determines whether you record the new asset at fair value or carry forward the old asset's book value. Since this exchange lacks commercial substance, you cannot record the new equipment at its fair value. Instead, you must use the book value of the old equipment plus any cash paid. Here's the calculation: Old equipment's book value: $100,000 (cost) - $70,000 (accumulated depreciation) = $30,000 Cash paid: $25,000 Cost of new equipment: $30,000 + $25,000 = $55,000 This makes C ($55,000) correct. Looking at the wrong answers: A (35,000)incorrectlyusesjustthetrade−inallowance,ignoringthecashpayment.Thisrepresentsacommontrapwherestudentsfocusonthetrade−invalueratherthanapplyingtheproperaccountingrule.B(35,000) incorrectly uses just the trade-in allowance, ignoring the cash payment. This represents a common trap where students focus on the trade-in value rather than applying the proper accounting rule. B (60,000) uses the list price of the new equipment, which would only be correct if the exchange had commercial substance. D ($30,000) only considers the book value of the old equipment while ignoring the additional cash paid. The trade-in allowance of $35,000 is essentially irrelevant for accounting purposes when an exchange lacks commercial substance—it's just the dealer's valuation used to determine how much additional cash is needed. Remember: No commercial substance means no fair value recognition. Always carry forward the old asset's book value plus any additional consideration paid when exchanges lack commercial substance.

Question 8

Phoenix Manufacturing sold a piece of equipment on December 31, 2023, for $42,000. The equipment was purchased on January 1, 2020, for $75,000 and was being depreciated over 10 years using the straight-line method with a $5,000 salvage value. Depreciation for 2023 has not yet been recorded. What is the gain or loss on the sale?

  1. Gain of $9,000
  2. Gain of $2,000
  3. Loss of $12,000
  4. Loss of $5,000 (correct answer)
Explanation: When you encounter asset disposal problems, you need to determine the asset's book value at the sale date, then compare it to the sale price. The difference creates either a gain (if sale price exceeds book value) or a loss (if book value exceeds sale price). First, calculate the annual depreciation: $75,000−$5,00010 years=$7,000 per year\frac{\$75,000 - \$5,000}{10 \text{ years}} = \$7,000 \text{ per year} Since depreciation for 2023 hasn't been recorded yet, you need to include it. From January 1, 2020, through December 31, 2023, that's 4 full years of depreciation: 4×$7,000=$28,0004 \times \$7,000 = \$28,000 The book value at sale is: $75,000−$28,000=$47,000\$75,000 - \$28,000 = \$47,000 Since the equipment sold for $42,000 but had a book value of $47,000, there's a loss of $\47,000 - $42,000 = $5,000 Answer A (9,000gain)likelycalculateddepreciationforonly3years,ignoringthat2023′sdepreciationmustberecordedbeforethesale.AnswerB(9,000 gain) likely calculated depreciation for only 3 years, ignoring that 2023's depreciation must be recorded before the sale. Answer B (2,000 gain) appears to have used the salvage value incorrectly in the calculation. Answer C ($12,000 loss) probably forgot to subtract the salvage value when calculating annual depreciation, using $7,500 per year instead of $7,000. Always remember the key steps for asset disposals: update depreciation through the disposal date, calculate current book value, then compare to sale proceeds. Don't forget that depreciation must be current as of the disposal date, even if it hasn't been formally recorded yet.