Question

Mercury Inc. purchased equipment in 2019 at a cost of $212,000. The equipment was expected to produce 460,000 units over the next five years and have a residual value of $28,000. The equipment was sold for $115,600 part way through 2021. Actual production in each year was: 2019 = 65,000 units; 2020 = 104,000 units; 2021 = 52,000 units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposal date.

Required:
1. Calculate the gain or loss on the sale.
2. Prepare the journal entry to record the sale.
3. Assuming that the equipment was instead sold for $143,600, calculate the gain or loss on the sale.
4. Prepare the journal entry to record the sale in requirement 3.

Answer 1

1)
		Amount($)
A	Cost	2,12,000
B	Residual Value	28,000
C = A - B	Depreciable base	1,84,000
D	Expected no. of units	4,60,000
E = C/D	Depreciable rate per unit	0.40
	Units produced:
	in 2019	65,000
	in 2020	1,04,000
	in 2021	52,000
F	Total units produced	2,21,000
G = E x F	Accumulated Depreciation till date of sale	88,400
H = A - G	Book Value at time of sale	1,23,600
I	Sold for	1,15,600
J = H - I	Loss on Sale	8,000

2)
Accounts title	Debit($)	Credit($)
Cash	1,15,600
Accumulated Depreciation - Equipment	88,400
Loss on sale [of equipment]	8,000
Equipment		2,12,000
(Equipment sold)

3)
A	Book Value at time of sale	1,23,600
B	Sold for	1,43,600
C = B - A	Gain on Sale	20,000

Accounts title	Debit($)	Credit($)
Cash	1,43,600
Accumulated Depreciation - Equipment	88,400
Gain on Sale [of equipment]		20,000
Equipment		2,12,000
(Equipment sold)