Question

Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $150,000. The residual value of the lathe was estimated to be $15,000 at the end of a five-year life. The lathe was sold on March 31, 2018, for $45,000. Howarth 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 a schedule to calculate the gain or loss on the sale.
2. Prepare the journal entry to record the sale.
3. Assuming that Howarth had instead used the sum-of-the-years’-digits depreciation method, prepare the journal entry to record the sale.

Answer 1

Answer 1  

Schedule to calculate the gain or loss on the sale

Cost	Per annum depreciation	Accumulated depreciation June 30, 2014 - March 31 2018 (45 months)	Net book value as on March 31, 2018	Sales Value	Loss
$150,000	($150,000 - $15,000) / 5 years = $27,000	($27,000 * 45 / 12) = $101,250	($150,000 - $101,250) = $48,750	$45,000	($45,000 - $48,750) = $3,750

Answer 2

Date	General Journal	Debit ($)	Credit ($)
March 31, 2018	Cash	45,000
	Accumulated depreciation - Lathe	101,250
	Loss on sale of lathe	3,750
	Lathe		150,000
	(To record sale of lathe & loss on sale thereon)

Answer 3

Working Note : Accumulated depreciation under sum-of-the-years’-digits depreciation method

Depreciation under sum-of-the-years’-digits depreciation method

= (Cost - Salvage Value) * (Remaining useful life / sum-of-the-years’-digits)

where sum-of-the-years’-digits = [useful life * (useful life + 1) ] / 2 = [5 * (5 +1) ] / 2 = 15

Year	Cost - Salvage Value	Depreciation factor	Depreciation Expense
1	$135,000	5 / 15	($135,000 * 5 /15) = $45,000
2	$135,000	4 / 15	($135,000 * 4 /15) = $36,000
3	$135,000	3 / 15	($135,000 * 3 /15) = $27,000
4	$135,000	2 / 15	($135,000 * 2 /15) * 9 / 12 = $13,500
Accumulated depreciation			$121,500

** Note : Accumulated depreciation is for 3 years 9 months .

Gain on sale of lathe = $45,000 - ($150,000 - $121,500) = $16,500

Journal Entry

Date	General Journal	Debit ($)	Credit ($)
March 31, 2018	Cash	45,000
	Accumulated depreciation - Lathe	121,500
	Lathe		150,000
	Gain on sale of lathe		16,500
	(To record sale of lathe & gain on sale thereon)