Question

Mercury Inc. purchased equipment in 2016 at a cost of $249,000. The equipment was expected to produce 510,000 units over the next five years and have a residual value of $45,000. The equipment was sold for $134,800 part way through 2018. Actual production in each year was: 2016 = 71,000 units; 2017 = 114,000 units; 2018 = 58,000 units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposal date.

Required:
1. Prepare the journal entry to record the sale.
2. Assuming that the equipment was sold for $163,800, prepare the journal entry to record the sale.

Answer 1

• All working forms part of the answer
• Working #1

A	Cost	$          249,000.00
B	Residual Value	$            45,000.00
C=A - B	Depreciable base	$          204,000.00
D	Usage (units)	510,000
E	Depreciation per unit	$                       0.40 per unit

• Working #2

Year	Book Value	Usage	Depreciation expense	Ending Book Value
1	$           249,000.00	71,000	$         28,400.00	$           220,600.00
2	$           220,600.00	114,000	$         45,600.00	$           175,000.00
3	$           175,000.00	58,000	$         23,200.00	$           151,800.00

• Requirement #1

Accounts title	Debit	Credit	Working
Cash	$                     134,800		[Cash received = Sold for]
Accumulated Depreciation - Equipment	$                       97,200		[(71000 + 114000 + 58000) x $0.40 ]
Loss on sale of Equipment	$                       17,000		[249000 - 17000 - 97200 - 134800]
Equipment		$             249,000	[Cost]
(Equipment sold)

• Requirement #2

Accounts title	Debit	Credit	Working
Cash	$                     163,800		[Cash received = Sold for]
Accumulated Depreciation - Equipment	$                       97,200		[(71000 + 114000 + 58000) x $0.40 ]
Gain on Sale of Equipment		$                12,000	[163800 + 97200 - 249000]
Equipment		$             249,000	[Cost]
(Equipment sold)