Final answer:
When a company disposes of equipment for more than its book value, the equipment and cash accounts are affected. The equipment account is debited by the book value, and the cash account is credited by the amount of cash received. The gain on sale is credited, increasing the company's net income and net worth.
Step-by-step explanation:
When a company disposes of a piece of equipment for cash, with the amount of cash received being greater than the book value of the equipment, several accounts on the company's balance sheet are affected. The two primary accounts that are impacted are the equipment account (an asset account) and the cash account (another asset account). The equipment account will decrease by the book value of the equipment, and the cash account will increase by the amount of cash received.Additionally, if the cash received is greater than the book value of the disposed equipment, a gain on disposal account (which is part of equity on the income statement) is also affected.
This gain represents a credit and increases the overall net income of the company. Using T-accounts to visualize the transaction, one would debit the equipment account for its book value, credit the cash account for the amount received, and credit the gain on sale of equipment account for the difference between the cash received and the book value of the equipment. This reflects an increase in assets (cash) and a corresponding increase in net worth (through the gain).The net worth, as indicated in the referenced T-account information, will increase due to the gain, bolstering the financial position of the company reflecting a healthier business.