Question

Asset Disposal

Assume that Gonzalez Company purchased an asset on January 1, 2015, for $40,000. The asset had an estimated life of six years and an estimated residual value of $4,000. The company used the straight-line method to depreciate the asset. On July 1, 2017, the asset was sold for $27,690.

Required:

1. Identify and analyze the effect of the transaction for depreciation for 2017.

Activity	Operating
Accounts	Depreciation Expense Increase, Accumulated Depreciation - Asset Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Depreciation for 2015 to 2017: the straight-line method of depreciation allocates cost of the asset evenly over time. Set up a T account for accumulated depreciation.
Depreciation journal entry:
Record depreciation for 6 months updating for sale of asset.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Depreciation Expense

Accumulated Depreciation - Asset

Feedback

Partially correct

Identify and analyze the effect of the sale of the asset.

Activity	Investing
Accounts	Accumulated Depreciation - Asset Decrease, Cash Increase, Asset Decrease, Gain on Sale of Asset Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Record sale:
Book value = asset acquisition cost (amount recorded in account) less the accumulated depreciation. Determine the gain or loss. Increase Cash for amount received. Remove the asset account and associated Accumulated Depreciation account.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Feedback

Incorrect

2. How should the gain or loss on the sale of the asset be presented on the income statement?

The gain or loss should appear in the Other Income/Expense category  of the income statement to indicate that it is not  part of the normal operating activity of the company.

Feedback

Correct

Feedback

Partially correct

Answer 1

1)
Cost	$40,000.00
Less: Salvage value	$4,000.00
Depreciable Cost	$36,000.00
Depreciation Rate = 1/6	16.67%
Annual depreciation expense	$6,000.00
	Computation
Year	Depreciable cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
2015	$36,000.00	X	16.67%	=	$6,000.00	$6,000.00	$34,000.00
2016	$36,000.00	X	16.67%	=	$6,000.00	$12,000.00	$28,000.00
2017	$36,000.00	X	8.33%	=	$3,000.00	$15,000.00	$25,000.00
Journal entry	Debit	Credit
Depreciation Expense (6000/2)	$3,000.00
Accumulated Depreciation—Asset		$3,000.00
To record depreciation of asset
Balance Sheet							Income Statement
				Stockholders'			Net
Assets	=	Liabilities	+	Equity		Revenues	–	Expenses	=	Income
Accumulated Depreciation - Asset (-3000)				-3000				Depreciation Expense (-3000)
Journal entry	Debit	Credit
Cash	$ 27,690.00
Accumulated Depreciation—Asset	$15,000.00
Gain on Sale of Asset		$  2,690.00
Asset		$40,000.00
To record sale of the asset.
Balance Sheet							Income Statement
				Stockholders'			Net
Assets	=	Liabilities	+	Equity		Revenues	–	Expenses	=	Income
Cash      27690				$ (3,000.00)				Depreciation Expense (-3000)
Accumulated Depreciation—Asset     15000				$  2,690.00
Asset = -40000
2)
The  gain  or  loss  should  appear  in  the Other  Income  category  of  the  income state-ment to indicate that it is not part of the normal operating activity of the company