Question

Morris Inc. recorded the following transactions over the life of a piece of equipment purchased in Year 1:

Jan.	1,		Year		1		Purchased equipment for $101,000 cash. The equipment was estimated to have a five-year life and $4,000 salvage value and was to be depreciated using the straight-line method.
Dec.	31,		Year		1		Recorded depreciation expense for Year 1.
Sept.	30,		Year		2		Undertook routine repairs costing $900.
Dec.	31,		Year		2		Recorded depreciation expense for Year 2.
Jan.	1,		Year		3		Made an adjustment costing $3,600 to the equipment. It improved the quality of the output but did not affect the life and salvage value estimates.
Dec.	31,		Year		3		Recorded depreciation expense for Year 3.
June.	1,		Year		4		Incurred $1,950 cost to oil and clean the equipment.
Dec.	31,		Year		4		Recorded depreciation expense for Year 4.
Jan.	1,		Year		5		Had the equipment completely overhauled at a cost of $11,200. The overhaul was estimated to extend the total life to seven years. The salvage value did not change.
Dec.	31,		Year		5		Recorded depreciation expense for Year 5.
Oct.	1,		Year		6		Received and accepted an offer of $30,000 for the equipment.

Required: Prepare the journal entry for the disposal of the equipment on October 1, Year 6.

Answer 1

The following are the journal entries for the disposal of equipment:

YEAR -1

Jan 1 Equipment A/c Dr $101,000

To Cash A/c $101,000

Depreciation = (Cost - Salvage value)/estimated life

= ($101,000-$4,000)/5

= $19,400

Dec 31 Depreciation A/c Dr $19,400

To Equipment A/c $19,400

Closing balance of equipment at the end of year-1 = $101,000-$19,400

= $81,600

YEAR-2

Sep 30 Repairs & Maintenance A/c Dr $900

  To Cash A/c $900

Since repair costs are for the CY $900 should be expensed and not added to the carrying value of the equipment

Dec 31 Depreciation A/c Dr $19,400

To Equpiment A/c $19,400

Closing balance of equipment at the end of year-2 = $81,600-$19,400

= $62,200

YEAR-3

Jan 1 Equpiment A/c Dr $3,600

To Cash A/c $3,600

Dec 31 Depreciation* A/c Dr $ 20,600

To Equipment A/c $20,600

*Depreciation = (62200+3600)-4000/3

= 20,600

Closing balance of equipment at the end of year-3 = $62,200+$3,600-$20,600

= $45,200

YEAR-4

Jan 1 Repairs and maintenance A/c Dr $1,950

To Cash A/c $1950

Dec 31 Depreciation A/c Dr $20,600

To Equipment A/c $20,600

Closing balance of equipment at the end of year-$ = $45,200-$20,600

= $24,600

YEAR-5

Jan 1 Equpiment A/c Dr $11,200

To Cash A/c $11,200

Dec 31 Depreciation** A/c Dr $10,600

To Equpiment A/c $10,600

**Depreciation = (($24,600+$11,200)-$4,000)/3 (7-4)

= $10,600

Closing balance of Equipment at the end of year-5 = $24,600+$11,200-$10,600

= $25,200

YEAR-6

Journal entry for disposal of Equipment on Oct 1:

Oct 1 Cash A/c Dr $30,000

To Equipment A/c $25,200

To Profit on disposal

of Equipment A/c $4,800