In: Accounting
Sale of Asset
Equipment acquired on January 9, 20Y3, at a cost of $475,000, has an estimated useful life of 15 years, an estimated residual value of $85,500, and is depreciated by the straight-line method.
a. What was the book value of the equipment at
the end of the fifth year, December 31, 20Y7? Round your interim
calculations and final answer to the nearest dollar.
$
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b1. Assuming that the equipment was sold on July 1, 20Y8, for $213,750, illustrate the effects on the accounts and financial statement of depreciation for the six months until the sale date.
Workings: | ||
Equipment Acquisition | ||
Date | January 9, 20Y3 | |
Acquisition Cost (A) | $475,000 | |
Residual Value (B) | $85,000 | |
Total Depreciation over 15 years (C = A - B) | $390,000 | |
Depreciation Period (in years) (D) | 15 | |
Hence, | ||
Annual Depreciation (C/D) | $26,000 | |
6 month Depreciation | $13,000 | |
Accounting Entries at the time of Purchase of Equipment | ||
Equipment A/C Dr | $475,000 | |
To Bank A/C | $475,000 | |
(being entry passed for purchase of equipment, assumed to paid from Bank) |
a. | Book Value of the Equipment at the end of 5 years | |||
Annual Depreciation | $26,000 | |||
5 Year Depreciation | $130,000 | |||
(since straight line method is followed for depreciation) | ||||
Therefore, | ||||
Cost of Acquisition of Equipment | $475,000 | |||
Less: Depreciation for 5 Years | ($130,000) | |||
Closing Book Value at the end of 5 Years | $345,000 | |||
Accounting Entries for usage of Equipment for each of the 5 Years | ||||
Depreciation A/C Dr | $26,000 | |||
To Accumulated Depreciation A/C | $26,000 | |||
(being entry passed for annual depreciation, credited to Accumulated Depreciation A/C) | ||||
Reflection of Equipment on the Books of Account | ||||
Equipment (At Cost) | $475,000 | |||
Less: Accumulated Depreciation | ($130,000) | |||
Equipment (at Book Value) | $345,000 |
b1. | Equipment sold on July 1, 20Y8 | |||
Total usage of equipment = 5 Years 6 months | ||||
Annual Depreciation of the Equipment | $26,000 | |||
Total usage of the Equipment prior to Sale (years) | 5.5 | |||
Hence, total depreciation prior to Sale | $143,000 | |||
Therefore, | ||||
Cost of Acquisition of Equipment | $475,000 | |||
Less: Depreciation for 5 Years | ($143,000) | |||
Closing Book Value at the end of 5 Years 6 months (time of Sale) (X) | $332,000 | |||
Actual Sale value Realised (Y) | $213,750 | |||
Profit/(Loss) on Sale of Equipment (Y - X) | ($118,250) | |||
Accounting Entries at the time of Sale | ||||
Entry for 6 months Depreciation | ||||
Depreciation A/C Dr | $13,000 | |||
To Accumulated Depreciation A/C | $13,000 | |||
(being entry passed for 6 month depreciation, credited to Accumulated Depreciation A/C) | ||||
Entry for Sale of Equipment | ||||
Bank A/C Dr | $213,750 | |||
Loss on Sale of Equipment A/C Dr | $118,250 | |||
To Equipment A/C | $332,000 | |||
(being entry passed for sale of equipement, net of Loss on Sale) |