A company purchased and installed equipment on January 1 at a total cost of $72,

Question

A company purchased and installed equipment on January 1 at a total cost of $72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no salvage value. The equipment was disposed of on July 1 of the fourth year. The company uses the calendar year. 1. Prepare the general journal entry to update depreciation to July 1 in the fourth year 2. Prepare the general journal entry to record the disposal of the equipment under each of these three independent situations: a. The equipment was sold for $22,000 cash. b. The equipment was sold for $15,000 cash. c. The equipment was totally destroyed in a fire and the insurance company settled the claim for $18,000 cash. Answer

Explanation / Answer

Depreciation expense=(Original cost-salvage value)/useful life=(72000-0)/5=14400 1 Date Account titles Debit Credit Jul. 1 Depreciation expense 7200 Accumulated depreciation 7200 (14400*1/2) (Depreciation recorded till July 1) 2 a. Jul. 1 Cash 22000 Accumulated depreciation (14000*3)+7200 49200 Loss on sale of equipment 800 Equipment 72000 (Sale of equipment) b. Jul. 1 Cash 15000 Accumulated depreciation (14000*3)+7200 49200 Loss on sale of equipment 7800 Equipment 72000 (Sale of equipment) c. Jul. 1 Cash 18000 Accumulated depreciation (14000*3)+7200 49200 compensation loss on equipment destroyed) 4800 Equipment 72000 (Equipment destroyed by fire and insurance received)

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