Question

Which accounts are affected, and in which direction, when a company disposes of a piece of equipment for cash, where the amount of cash received is less than the book value of the equipment?

a) Equipment and accumulated depreciation both decrease, cash increases, and the difference increases depreciation expense.
b) Equipment and accumulated depreciation both decrease, cash increases, and the difference decreases retained earnings.
c) Equipment and accumulated depreciation both decrease, cash increases, and the difference increases loss on disposal.
d) Cash and depreciation expense both increase, and equipment decreases. e) Equipment and accumulated depreciation both decrease, cash increases, and the difference increases disposal expense.

Answer 1

The correct answer is (c) which states equipment and accumulated depreciation accounts decrease, cash account increases, and the difference is recorded as a loss on disposal.

Step-by-step explanation:

When a company disposes of a piece of equipment for cash where the amount of cash received is less than the book value of the equipment, the accounts affected are:

• Equipment account: Decreases by the book value of the disposed equipment.
• Accumulated Depreciation: Decreases by the total accumulated depreciation for the equipment.
• Cash: Increases by the amount of cash received.
• Loss on Disposal: Increases by the difference between the book value of the equipment and the cash received.

Therefore, the correct answer is c) Equipment and accumulated depreciation both decrease, cash increases, and the difference increases loss on disposal. A loss occurs because the cash received from the sale is less than the net book value (cost less accumulated depreciation) of the equipment.