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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Disposal of fixed asset

Equipment acquired on January 6 at a cost of $375,000 has an estimated useful life of 20 years and an estimated residual value of $25,000.

a. What was the annual amount of depreciation for the Years 1-3 using the straight-line method of depreciation?

b. What was the book value of the equipment on January 1 of Year 4?

c. Assuming that the equipment was sold on January 3 of Year 4 for $300,000, journalize the entry to record the sale.

d. Assuming that the equipment had been sold on January 3 of Year 4 for $325,000 instead of $300,000, journalize the entry to record the sale.

a.

To determine

Disposal of Assets: Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

  • Disposal with no gain no loss: When the asset is disposed with no consideration received.
  • Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
  • Disposal with loss: When the asset is disposed for less than its book value.

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation = (Cost of the assetResidual value)Estimated useful life of the asset \

To determine: the annual amount of depreciation for the years1-3 using the straight-line method of depreciation.

Explanation

Determine the annual amount of depreciation for the years1-3.

Cost of the equipment= $375,000

Estimated Useful Life =20 years

Estimated Residual value =$25,000

AnnualDepreciation = (Cost of the assetResidual value)Estimated useful life of

b.

To determine
the book value of the equipment on January 1of Year 4.

c.

To determine

To record: the journal entry for the sale of the equipment on January 3 of Year 4.

d.

To determine

To record: the journal entry for the sale of the equipment on January 3 of Year 4.

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