Question

The Red Company purchased equipment on June 1, 2020.  Assuming the cost of the equipment is $66,000, the residual value is $6,000, a useful life of 5 years and the use of the straight line method. The company's year end is December 31.

1) What is depreciation expense at December 31, 2020? $ Answer

2) What is accumulated depreciation at December 31, 2022? $ Answer

3) What is the carrying value of the asset at December 31, 2023? $ Answer

4) What is the carrying value of the asset at January 1, 2024? $ Answer

5) What is depreciation expense at December 31, 2025? $ Answer

You were asked to prepare the journal entry to record the sale of the above equipment on December 31, 2022.  

Is it a gain or loss if the equipment was sold for $30,000? Answer

How much is the gain or loss? $ Answer

Answer 1

Depreciation = (Cost - Salvage Value)/ Useful life of Asset

=(66000 -6000)/5

= $12000

Depreciation per year = $12000

1) Depreciation Expense on Dec 31 2020

Depreciation Expense = $12000*7/12 = $7000

Since it is used only 7 months during the period

2) Accumulated Depreciation at Dec 31 2022

Accumulated Depreciation = Depreciation for 2020 + Depreciation for 2021 + Depreciation for 2022

Accumulated Depreciation at dec 31 2023 = $7000 + $12000 +$12000

=$31000

3) Carrying VAlue of Asset on December 31 2023

Carrying Value = Cost of Asset - Accumulated Depreciation till DEc 31 2023

Carrying Value = $66000 - $43000 = $23000

4)Carrying Value of asset on January 1 2024 = $24000 (Carrying value at Dec 31 2023 will be the Carrying value of Asset on Jan 1 2024)

5)Depreciation Expense at 31 Dec 2025 = $12000

Since SLM method is followed Depreciation remains same in alll the years

6) Gain or Loss on Sale of Asset

Book value = cost - Accumulated Depreciation

=$66000 - $31000

=$35000

Sale value of Asset = $30000

Loss on Sale of Asset = $35000 -$30000 = $5000

Date	General JOurnal	Debit	Credit
Dec 31 2022	Cash	$30000
	Loss on Sale	$5000
	Accumulated Depreciation	$31000
	Equipment		$66000