This year Amy purchased $3,480 of equipment for use in her business. However, th

Question

This year Amy purchased $3,480 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation expense for the equipment. After the accident, Amy had the choice of repairing the equipment for $2,240 or selling the equipment to a junk shop for $495. Amy sold the equipment. What amount can Amy deduct for the loss of the equipment? Deductible amount After the accident, Amy repaired the equipment for $1,220. What amount can Amy deduct for the loss of the equipment? Deductible amount After the accident, Amy could not replace the equipment so she had the equipment repaired for $4,700. What amount can Amy deduct for the loss of the equipment? Deductible amount

Explanation / Answer

It is evident from the question that the damage has occured during transit. That is, the equipment has not come to the books of accounts of Amy. but there was a cash outlay for the purchase which is $3480.

a) In the first case : Amy sold the equipment at $495, the loss would be $3480-$495 = $2985.(in pure accounting terms)

Since Amy has paid the price for the equipment, the cost can be considered as a sunk cost and hence it is irrelevant. If she repairs the equipment at $2240, the equipment would be working fine. So the option of repairing and presenting the asset in the financial statements was foregone by Amy. Hence, the loss can be considered as $2240-$495 = $1745 in cost accounting terms.

b) In the second case, since Amy has repaired the equipment for $1220, the total outlay on the equipment is 3480+1220 = $4700.00. Here, the term loss is irrelevant since the asset is not disposed. Though there was an outlay in terms of repair, it has not increased the productivity of the equipment. Hence, the expenditure can be considered as a revenue expenditure. In layman terms the loss would be $1220.

c) In the third case, there is no option for replacement of the equipment. She has spent an amount which is more that the cost of the equipment for repairs. Since, the asset is not transfered, the loss can be considered as $4700.

Thanks

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