Equipment acquired on January 3, 2007, at a cost of $504,000, has an estimated u
ID: 2349239 • Letter: E
Question
Equipment acquired on January 3, 2007, at a cost of $504,000, has an estimated useful life of 12 years, has an estimated residual value of $42,000, and is depreciated by the straight-line method.a. What was the book value of the equipment at December 31, 2010, the end of the year?
b. Assuming that the equipment was sold on April 1, 2010, for $315,000, illustrate the effects on the accounts and financial statements of (1) depreciation for the three months until the sale date, and (2) the sale of the equipment.
Explanation / Answer
Straight line depreciation on this asset would be (504,000 - 42,000) / 12 = 38,500 annual depreciation. a. At the end of the third year, 3 years' worth of depreciation would have been expensed: 38,500 times 3 = 115,500. The book value then would be 504,000 - 115,500 = 388,500 b. Depreciation for 3 months is 38,500 times 3/12 or 9,625. The journal entry would be: Debit Depreciation Expense 9625 Credit Accumulated Depreciation 9625 This would increase both the accumulated depreciation account for the equipment and the depreciation expense account. Thus, bringing the book value of the equipment down. It would Decrease assets and increase expenses on the financial statements. For the sale of the equipment, the journal entry would be: Debit: Accumulated Depreciation 125,125 Cash 315,000 Loss on sale 63875 Credit: Equipment 504,000 This would affect the asset accounts - take the equipment and its accumulatd depreciation off the books, add cash and also a loss. Total assets would decrease since the book value of the tractor was more than the cash, and income would be decreased from the losss.
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