On June 30, 2011, a fire in Oak Company's plant caused the total loss of a production machine. The machine was being depreciated at $20,000 annually and had a carrying amount of $160,000 at December 31, 2010. On the date of the fire, the fair value of the machine was $220,000, and Pine received insurance proceeds of $200,000 in October 2011. In its income statement for the year ended December 31, 2011, what amount should Oak recognize as a gain or loss on disposition?

Question

Quizplus · Accepted Answer

Since the fair value of the machine on the date of the fire was $220,000 and the insurance proceeds received was $200,000, Oak will recognize a gain of $20,000 ($220,000 - $200,000) on insurance settlement. Additionally, since the carrying amount of the machine was $160,000 and the fair value was $220,000, Oak will recognize a further gain of $60,000 ($220,000 - $160,000) on the loss of the machine. Therefore, Oak should recognize a total gain of $80,000 ($20,000 + $60,000) on the disposition of the production machine.

On June 30, 2011, a Fire in Oak Company's Plant