Question

Disposal of Fixed Asset

Equipment acquired on January 8, 20Y1, at a cost of $517,500, has an estimated useful life of 16 years and an estimated residual value of $103,500.

a. What was the annual amount of depreciation for the years 20Y1, 20Y2, and 20Y3, using the straight-line method of depreciation? Round annual depreciation to the nearest dollar and use this amount in your follow-on calculations.

	Depreciation expense
20Y1	$
20Y2	$
20Y3	$

b. What was the book value of the equipment on January 1, 20Y4?
$

For decreases in accounts or outflows of cash, enter your answers as negative numbers. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank.

c. Assuming that the equipment was sold on January 7, 20Y4, for $155,250, illustrate the effects on the accounts and financial statements of the sale.

Statement of Cash Flows Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity + - = Jan. 7. Statement of Cash Flows Income Statement

d. Assuming that the equipment was sold on January 7, 20Y4, for $646,875 instead of $155,250, illustrate the effects on the accounts and financial statements of the sale.

Statement of Cash Flows Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity + - = Jan. 7. Statement of Cash Flows Income Statement

Answer 1

a)The annual amount of depreciation for the years 20Y1, 20Y2, and 20Y3, using the straight-line method of depreciation is as follows:

Depreciation Expenses p.a. = ( Cost - Salavge Value) / Useful Life

= ($517,500 - $103,500) / 16 years

   = $414,000 /16

= $25,875

Under the straight-line method of depreciation, the depreciation is fixed every year.

So

Years	Depreciation expenses ($)
20Y1	25,875
20Y2	25,875
20Y3	25,875

b) The the book value of the equipment on January 1, 20Y4 is as follows:

Years	$
Cost of Equipment (January 8, 20Y1 )	517,500
Depreciation Expenses	25,875
Book Value on December 31,20Y1	491.625
Depreciation Expenses	25,875
Book Value on December 31,20Y2	465,750
Depreciation Expenses	25,875
Book Value on December 31,20Y3	$439,875

The the book value of the equipment on (December 31,20Y3) January 1, 20Y4 is $439,875

c) The effects on the accounts and financial statements of the sale is as follows:

Years	$
Cost of Equipment (January 8, 20Y1 )	517,500
Depreciation Expenses	25,875
Book Value on December 31,20Y1	491.625
Depreciation Expenses	25,875
Book Value on December 31,20Y2	465,750
Depreciation Expenses	25,875
Book Value on December 31,20Y3	$439,875
Sale on January 7, 20Y4,	$155,250
Loss on sale of  Equipment	($284,625)

1)Statment of Cash Flow:  

	$
Cash From Operating Activities:
Loss on sale of  Equipment	284,625
Cash From Investing activities:
Sale of of  Equipment	155,250

2) Income Statement

	$
Loss on sale of  Equipment	284,625

3) Accounting Equation :

Assets	+		=	Liability	Stockholder's Equity
Cash		Equipment
+ 155,250		- 465,750	=		- 25,875 (Depreciation)
					- 284,625 (Loss on sale)

d) The effects on the accounts and financial statements of the sale is as follows:

Years	$
Cost of Equipment (January 8, 20Y1 )	517,500
Depreciation Expenses	25,875
Book Value on December 31,20Y1	491.625
Depreciation Expenses	25,875
Book Value on December 31,20Y2	465,750
Depreciation Expenses	25,875
Book Value on December 31,20Y3	$439,875
Sale on January 7, 20Y4,	$646,875
Gain on sale of  Equipment	$207,000

1)Statment of Cash Flow:  

	$
Cash From Operating Activities:
Gain on sale of  Equipment	( 207,000)
Cash From Investing activities:
Sale of of  Equipment	646,875

2) Income Statement

	$
Gain on sale of  Equipment	( 207,000)

3) Accounting Equation :

Assets	+		=	Liability	Stockholder's Equity
Cash		Equipment
+ 646,875		- 465,750	=		- 25,875 (Depreciation)
					207,000(Gain on sale)