Question

On July 1, 20X4, one of Rudd Co.'s delivery vans was destroyed in an accident. On that date, the van's carrying value was $2,500. On July 15, 20X4, Rudd received and recorded a $700 invoice for a new engine installed in the van in May 20X4, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van.What amount should Rudd report as gain (loss) on disposal of the van in its 20X4 income statement?a. $ 1,000
b. $ 300
c. $ 0
d. $ 200

Answer 1

Answer: Profit on disposal = $300

Explanation:

Carrying value = $2500

Engine costs   = $700

Repair Cost    = $500

Insurance Payout= $3500

The new carrying Value = 2500 + 700 = 3200

Profit on Disposal  = 3500 - 3200 = 300

the profit on Disposal that will be recognised in the financial statement is $ 300.

The costs incurred for Repairs are not capitalised in the value of the asset (van) because repairs do not increase the value an asset . It is just an expense incurred to keep the asset working. The amount of $ 700 paid for the engine is capitalised because engine is an asset  

that increases the value of the van and the engine can even be sold separately.

The insurance policy payout is treated as a replacement cost since the carrying value is $ 3200 and the insurance payout is $ 3500  

the profit realised on disposal is $ 300