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In: Accounting

Sale of Asset Equipment acquired on January 9, 20Y3, at a cost of $475,000, has an...

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.
$

For decreases in accounts or outflows of cash, enter your answers as negative numbers. Round annual depreciation to the nearest dollar and use this amount in your follow-on calculations. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank.

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.

Solutions

Expert Solution

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)

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