Question

Faster Company purchased equipment in 2010 for $104,000 and estimated an $8,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2016, there was $67,200 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2017, the equipment was sold for $21,000.

         Prepare the appropriate journal entries to remove the equipment from the books of Faster Company on March 31, 2017.

(b)    Lewis Company sold equipment for $11,000. The equipment originally cost $25,000 in 2014 and $6,000 was spent on a major overhaul in 2017 (charged to the Equipment account). Accumulated Depreciation on the equipment to the date of disposal was $20,000.

         Prepare the appropriate journal entry to record the disposition of the equipment.

(c)    Selby Company sold equipment that had a book value of $13,500 for $15,000. The equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment.

         Prepare the appropriate journal entry to record the disposition of the equipment.

Answer 1

Q1) Depreciation expense should be calculated first.

Depreciation expense for each year = (Purchase cost – Salvage value) / Life years

                                                            = (104,000 – 8,000) / 10

                                                            = 96,000

                                                            = $9,600

Accumulated depreciation is for 7 years, since the year 2010 to 2016 is a gap of 7 years.

Accumulated depreciation = Depreciation expense × 7 years

                                                = 9,600 × 7

                                                = $67,200 (tally)

The equipment is sold on 31^st March, 2017. Therefore, 3 months’ depreciation should be calculated, because the depreciation up to 31^st December 2016 is within the accumulated depreciation amount and the additional 3 months are left out (January 2017, February 2017, and March 2017).

Additional depreciation expense = Depreciation for whole year × (3 months / 12 months in a year)

                                                     = 9,600 × (3 / 12)

                                                     = $2,400

Regarding the journal: Cash account should be debited, since this is an asset and incoming. All depreciation amounts should be debited, since these are earlier provisions. Equipment account should be credited, because this is an asset and going off. The rest of the amounts is loss (balance figure) and should be debited because of tallying the journal.

Journal

Date	Account titles & explanation	P.ref	Debit	Credit
31/3/2017	Cash		$21,000
	Accumulated depreciation		$67,200
	Depreciation expense		$2,400
	Loss on sale of equipment		$13,400
	Equipment			$104,000
	To record sale of equipment at loss