Question

Mercury Inc. purchased equipment in 2019 at a cost of $110,000. The equipment was expected to produce 380,000 units over the next five years and have a residual value of $34,000. The equipment was sold for $63,400 part way through 2021. Actual production in each year was: 2019 = 54,000 units; 2020 = 86,000 units; 2021 = 43,000 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 $84,400, calculate the gain or loss on the sale.
4. Prepare the journal entry to record the sale in requirement 3.

Answer 1

Depreciation for 2019.

Depreciation per unit =(110,000 -34,000)/380,000

Depreciation per unit = 0.20 per unit.

Depreciation expense = 54,000 units x $ 0.20

Depreciation expense = $ 10,800.

Depreciation for 2020.

Depreciation expense = 86,000 units x $ 0.20

Depreciation expense = $ 17,200.

Depreciation for 2021.

Depreciation expense = 43,000 units x $ 0.20

Depreciation expense = $ 8,600.

Accumulated Depreciation = 10,800 + 17,200 + 8,600

Accumulated Depreciation = $ 36,600.

Book value on sale = Cost - Accumulated Depreciation.

Book value on sale = 110,000 - 36,600

Book value on sale = $ 73,400.

Sale proceeds = 63,400

So book value having $ 73,400 is sold for $ 63,400 which means that there is a loss of $ 10,000.

1. Loss on sale = ( $ 10,000).

2.

Date	Accounts	Debit	Credit
1	Cash	$ 63,400
	Accumulated Depreciation	$ 36,600
	Loss on sale	$ 10,000
	To Equipment		$ 110,000

3. Assuming that the equipment is sold for $ 84,400.

Gain on sale = 84,400 - 73,400

Gain on sale = $ 11,000.

4. Journal entry.

Date	Accounts	Debit	Credit
1	Cash	$ 84,400
	Accumulated Depreciation	$ 36,600
	To Equipment		$ 110,000
	To gain on sale		$ 11,000

SUMMARY:

All requirements have been provided.