Question

On July 1, 2016, Farm Fresh Industries purchased a specialized delivery truck for $227,000. At the time, Farm Fresh estimated the truck to have a useful life of eight years and a residual value of $35,000. On March 1, 2021, the truck was sold for $109,000. Farm Fresh uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service. Required: 1. Prepare the journal entry to update depreciation in 2021. 2. Prepare the journal entry to record the sale of the truck. 3. Assuming that the truck was instead sold for $126,000, prepare the journal entry to record the sale.

Answer 1

Annual depreciation = (Cost price - Residual value)/Useful life

= (227,000 - 35,000)/8

= 192,000/8

= $24,000

Accumulated depreciation from July 1, 2016 to December 31, 2020 = 24,000 x 4.5

= $108,000

Depreciation expense to be recorded on March 1, 2021 = 24,000 x 2/12

= $4,000

Accumulated depreciation till the date of sale i.e. March 1, 2021 = 108,000 + 4,000

= $112,000

1.

Journal

March 1, 2021	Depreciation expense	4,000
	Accumulated depreciation - Equipment		4,000

2.

Book value of equipment = Cost price - Accumulated depreciation till the date of sale i.e. March 1, 2021

= 227,000 - 112,000

= $115,000

Sale price of equipment = $109,000

Loss on disposal of equipment = Book value of equipment - Sale price of equipment

= 115,000 - 109,000

= $6,000

Journal

March 1, 2021	Cash	109,000
	Accumulated depreciation - Equipment	112,000
	Loss on disposal of equipment	6,000
	Equipment		227,000

3.

Gain on disposal of equipment = Sale price of equipment - Book value of equipment

= 126,000 - 115,000

= $11,000

Journal

March 1, 2021	Cash	126,000
	Accumulated depreciation - Equipment	112,000
	Gain on disposal of equipment		11,000
	Equipment		227,000