Question

A Company purchased equipment on December 1, 2017 for $7,200 with a 2 years useful life. On March 1, 2019, the company decided to dispose the equipment. The equipment is depreciated under the straight-line method

Find :

Annual depreciation expense

Depreciation expense of the year 2017

Depreciation expense of the year 2018

Depreciation expense of the year 2019

Accumulated Depreciation at the disposal date

Book value at the disposal date: *

Assume that the equipment was sold for $2,100, what is the result of this disposal

Answer 1

Depreciation is decrease in the value of an asset due wear and tear. Every year annual depreciation is charged on the value of the assets. It is charged only for the period in which asset is used in the business. Straight line method, Written down value method, etc. are important methods of depreciation. The amount of annual depreciation is accumulated every year and at the time of disposal of the asset, the amount is adjusted with the cost of the asset to get book value at the time of disposal. If the asset is sold at a price higher than this book value, it is Gain on disposal of asset and if it is sold at a price lower than the book value, it is Loss on disposal of asset.

Here, in this question, it is given that,
Cost of the equipment = $7,200
Date of purchase = December 1, 2017
Useful life = 2 years
Method of depreciation = Straight line
Date of disposal = March 1, 2019
Sales price of asset on disposal = $2,100

Under straight line method, annual depreciation is charged by dividing the cost of the asset less salvage value by useful life.

1. Annual depreciation expense = $7,200 / 2 = $3,600

2. Depreciation expense of the year 2017 = $3,600 × 1/12 = $300

(The equipment is purchased on December 1, 2017. Hence, in 2017, it is used only for one month)

3. Depreciation expense of the year 2018 = $3,600
(In 2018, the equipment is used throughout the year)

4. Depreciation expense of the year 2019 = $3,600 × 2/12 = $600

(In 2019, the equipment is sold on March 1. Hence, it is used only for 2 months)

5. Accumulated depreciation at the disposal date = 2017 depreciation + 2018 depreciation + 2019 depreciation = $300 + $3,600 + $600 = $4,500

6. Gain or loss on disposal of equipment = Sales value - (cost of purchase - Accumulated depreciation)
= $2,100 - ($7,200 - $4,500)
= $2,100 - $2,700
-$600.

The asset is disposed at a price lower than the book value on the date of disposal.
Therefore, the result of disposal is a Loss.
Loss on disposal of equipment = $600.