Question

ABC company purchased equipment on January 1, 2015, for $50,000, with an estimated useful life of 5 years and an estimated residual value of $5,000. Assume the equipment was sold on April 30th 2017 for $25,000

Prepare journal entries for the following:

A) Calculate depreciation expense for 2015 and 2016 using straight line method of depreciation. Prepare the journal entry to record depreciation

B) Calculate depreciation for 2017 and record the journal entry

C) Prepare the journal entry for the sale of the equipment

Answer 1

Solution

ABC Company

1. Calculation of depreciation expense for 2015 and 2016 using straight line method of depreciation:

Entries to record depreciation:

Depreciation expense = depreciable base x 1/useful life

Depreciable base = (cost – residual value)

Cost = $50,000

Residual value = $5,000

Useful life = 5 years

Depreciable base = 50,000 – 5,000 = 45,000

Depreciation expense = 45,000 x 1/5 = $9,000

The annual depreciation expense under the straight line method would remain constant throughout the useful life of the asset.

Hence, the annual depreciation expense for years 2015 and 2016 is $9,000.

Date	Account Titles and Explanation	Debit	Credit
31-Dec	Depreciation Expense - Equipment	$9,000.00
	Accumulated Depreciation - Equipment		$9,000.00
	(To record the depreciation expense)
31-Dec-16	Depreciation Expense - Equipment	$9,000
	Accumulated Depreciation - Equipment		$9,000
	(To record the depreciation expense)

2. Calculation of depreciation expense for 2017 and the entry:

Depreciation expense at April 30, 2017,

Depreciation expense is for 4 months, Jan 1 – April 30 = 45,000 x 1/5 x 4/12 months = $3,000

The entry –

Date	Account Titles and Explanation	Debit	Credit
30-Apr	Depreciation Expense - Equipment	$3,000.00
	Accumulated Depreciation - Equipment		$3,000.00
	(To record the depreciation expense)

3. Entry for the sale of equipment:

Calculations –

Book value at date of sale, April 30, 2017 = cost – accumulated depreciation

Cost = $50,000

Accumulated Depreciation = depreciation expense for 2015, 2016 and April 30, 2017

= $9,000 + $9,000 + 3,000 = $21,000

Book value = 50,000 – 21,000 = $29,000

Gain or loss on sale –

Sale proceeds = $25,000

Book value = 29,000

Loss on sale of equipment = book value – sale proceeds

= 29,000 – 25,000 = ($4,000)

Date	Account Titles and Explanation	Debit	Credit
30-Apr	Cash	$25,000
	Accumulated Depreciation	$21,000
	Loss on Sale	$4,000
	Equipment		$50,000
	(To record sale of equipment)