Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $
ID: 2542615 • Letter: H
Question
Howarth Manufacturing Company purchased a lathe on June 30, 2014, at a cost of $180,000. The residual value of the lathe was estimated to be $15,000 at the end of a five-year life. The lathe was sold on March 31, 2018, for $48,000. Howarth uses the stralght- lIlne depreclation method for all of its plant and equipment. Partial-year depreclation is calculated based on the number of months the asset Is In service. Required: 1. Prepare a schedule to calculate the galn or loss on the sale. 2 Prepare the Journal entry to record the sale. 3. Assuming that Howarth had Instead used the sum-of-the-years-digits depreclation method, prepare the Journal entry to record the saleExplanation / Answer
1
Schedule for calculation of gain or loss on sale
Cost of the machine
$180,000
Less: salvage value
$15,000
Depreciable value
$165,000
Life of the asset
5 years
Depreciation rate =100% / 5years
20%
Purchase date
30-Jun-14
Sale date
31-Mar-18
Usage of asset
3 years 9months
Depreciation for 3 years 9 months
(165,000*20%*3.75)
$123,750
Net book value as on March 31, 2018
(Cost-depreciation)
$56,250
Sale value
$48,000
Loss on sale (Since book value is more than sale value)
$8,250
2
Journal entry
Date
Particulars
Debit
Credit
March 31, 2018
Cash on sale
$48,000
Accumulated depreciation
$123,750
Loss on sale of asset
$8,250
To Machinery/asset a/c
$180,000
3
Sum of years depreciation method
Year
Depreciation base
Remaining useful life
Depreciation fraction
Dep expense
1
$165,000
5
5/15
$55,000
2
$165,000
4
4/15
$44,000
3
$165,000
3
3/15
$33,000
4
$165,000
2
2/15*9mnths/12
$16,500
5
TOTAL depreciation
$148,500
Journal entry - sum of years method
Date
Particulars
Debit
Credit
March 31, 2018
Cash on sale
$48,000
Accumulated depreciation
$148,500
To Machinery/asset a/c
$180,000
To gain on sale of asset (Bal fig)
$16,500
1
Schedule for calculation of gain or loss on sale
Cost of the machine
$180,000
Less: salvage value
$15,000
Depreciable value
$165,000
Life of the asset
5 years
Depreciation rate =100% / 5years
20%
Purchase date
30-Jun-14
Sale date
31-Mar-18
Usage of asset
3 years 9months
Depreciation for 3 years 9 months
(165,000*20%*3.75)
$123,750
Net book value as on March 31, 2018
(Cost-depreciation)
$56,250
Sale value
$48,000
Loss on sale (Since book value is more than sale value)
$8,250
2
Journal entry
Date
Particulars
Debit
Credit
March 31, 2018
Cash on sale
$48,000
Accumulated depreciation
$123,750
Loss on sale of asset
$8,250
To Machinery/asset a/c
$180,000
3
Sum of years depreciation method
Year
Depreciation base
Remaining useful life
Depreciation fraction
Dep expense
1
$165,000
5
5/15
$55,000
2
$165,000
4
4/15
$44,000
3
$165,000
3
3/15
$33,000
4
$165,000
2
2/15*9mnths/12
$16,500
5
TOTAL depreciation
$148,500
Journal entry - sum of years method
Date
Particulars
Debit
Credit
March 31, 2018
Cash on sale
$48,000
Accumulated depreciation
$148,500
To Machinery/asset a/c
$180,000
To gain on sale of asset (Bal fig)
$16,500
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