Question

Marks Consulting purchased equipment costing $45,000 on January 1, Year 1. The equipment is estimated to have a salvage value of $5,000 and an estimated useful life of
8 years. Straight-line depreciation is used. If the equipment is sold on July 1, Year 5 for $20,000, the journal entry to record the sale will include a:

A) Credit to loss on sale for $10,000.
B) Debit to loss on sale for $10,000.
C) Credit to cash for $20,000.
D) Debit to accumulated depreciation for $22,500.

E) Debit to gain on sale for $2,500.

Answer 1

Firstly, we need to calculate the depreciation amount of the asset for a year.

Depreciation =( Cost - salvage value)/ Useful life

Depreciation per year = (45,000 - 5,000)/8

Depreciation per year = 5,000.

So, the depreciation per year for the equipment will be 5,000.

The asset is sold on July, Year 5. So the asset is used for 4 years and six months.

Depreciation upto date of sale = 5,000 x 4.50

Depreciation upto date of sale = $ 22,500.

So the value of asset on the date of sale will be cost minus accumulated depreciation. Here cost of an equipment will be the cost minus salvage value.

So cost of equipment = 40,000 - 22,500

Cost of equipment on date of sale = $ 17,500.

This asset is sold for $ 20,000 which means that there is an gain of $ 2,500 on sale of equipment.

So the entry will be debit to Cash amount of $ 20,000 and also debit the accumulated depreciation of $ 22,500.

Also, credit the cost of equipment $ 40,000 and also credit gain on sale of asset of $ 2,500.

Cash a/c. $ 20,000

Acvunulated depreciation $ 22,500

To Equipment $ 40,000

To gain on sale of asset $ 2,500

So, the correct option will be option D which is debit to accumulated depreciation $ 22,500.

SUMMARY :

The answer will be option D. That is debit to accumulated depreciation amounting $ 22,500.