Question

Howarth Manufacturing Company purchased equipment on June 30, 2017, at a cost of $100,000. The residual value of the equipment was estimated to be $10,000 at the end of a five-year life. The equipment was sold on March 31, 2021, for $24,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:
1. Prepare the journal entry to record the sale.
2. Assuming that Howarth had instead used the double-declining-balance method, prepare the journal entry to record the sale.

Answer 1

From June 30, 2017 to March 31, 2021 there are 45 months.

Life of the asset is 5 years ie. 60 months.

Depreciation expense per months = ($100,000 - $10,000) / 60 = $1,500

Depreciation for 45 months = 45 X $1,500 = $67,500

Book value of equipment = $100,000 - $67,500 = $32,500

Equipment valuing $32,500 is sold for $24,000. (ie. equipment sold for less than its book value)

Loss on sales of equipment = $32,500 - $24,000 = $8,500

1)

Date	Account Titles and Explanation	Debit	Credit
Mar 31, 2021	Cash	$24,000	-
	Accumulated depreciation	$67,500	-
	Loss on sales of equipment	$8,500	-
	Equipment	-	$100,000
	(To record sale of equipment)

Value of asset at double declining balance method:

Rate of depreciation = (100 / 5) X 2 = 40%

At the end of 2017 book value = $100,000 - ($100,000 X 40% X 6/12) = $80,000

At the end of 2018 book value = $80,000 - 40% = $48,000

At the end of 2019 book value = $48,000 - 40% = $28,800

At the end of 2020 book value = $28,800 - 40% = $17,280

Book value on March 31, 2021 = $17,280 - ($17,280 X 40% X 3/12) =15,552

Equipment valuing $15,553 is sold for $24,000. (ie. equipment sold for more than its book value)

Gain on sales of equipment = $24,000 - $15,552 = $8,448

2)

Date	Account Titles and Explanation	Debit	Credit
Mar 31, 2021	Cash	$24,000	-
	Accumulated depreciation	$84,448	-
	Gain on sale of equipment	-	$8,448
	Equipment	-	$100,000
	(To record sale of equipment)