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?

Gain $300

Explanation:

The installation of new engine for $700 needs to be capitalized i.e added to the cost of van.

The value should be $2500 increased by such expenditure i.e $700 i.e $3200 as on the date of accident.

The carrying amount specified here i.e $2500 represents value which is yet to be adjusted for engine installation cost.

The reason engine cost needs to be capitalized being it increases the life of the asset and future benefits and thus classified as a capital expenditure.

$500 represents repairs expense which should not be capitalized to the carrying value of the van and rather should be accounted for as an expense.

Thus, Profit to be reported upon disposal of such van should be: $3500 receipts less $3200 carrying value.

Profit of $300 should be recorded in the income statement.

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