Question

Cullumber Limited sells equipment on September 30, 2021, for $38,220 cash. The equipment originally cost $144,160 when purchased on January 1, 2019. It has an estimated residual value of $3,920 and a useful life of five years. Depreciation is recorded annually and was last recorded on December 31, 2020, the company's year end. Record debit side accounts first followed by credit side accounts. Prepare the journal entry to update depreciation using the straight-line method to September 30, 2021. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Prepare the journal entry to record the sale of the equipment. (List all debit entries before credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

To update depreciation using the straight-line method for Cullumber Limited, calculate annual depreciation, prorate it for 9 months, and execute the journal entry. For the sale of the equipment, determine the book value, compare it to the sale price, and record the journal entry including any loss on sale.

Step-by-step explanation:

When it comes to accounting for the sale of an asset and recording depreciation using the straight-line method, it's important to follow the systematic procedure of accounting journal entries. Since Cullumber Limited uses annual depreciation, and depreciation was last recorded on December 31, 2020, we need to update the depreciation to the date of sale, September 30, 2021. The straight-line depreciation per year for the equipment is calculated as: (cost - residual value) / useful life. That is ($144,160 - $3,920) / 5 = $28,048 per annum.

For the nine months of 2021, we prorate the annual depreciation: $28,048 * (9/12) = $21,036. The depreciation expense for the part of the year the asset was in use before the sale is therefore $21,036. Now, we can prepare the journal entry for the depreciation update:

1. Debit Depreciation Expense $21,036
2. Credit Accumulated Depreciation - Equipment $21,036

Next, to record the sale of the equipment, the book value of the equipment must be determined, which is the original cost minus accumulated depreciation up to the sale date. The cumulative depreciation up to December 31, 2020, was $28,048 (for one full year), and an additional $21,036 for the nine months in 2021, totaling $49,084. The book value is, therefore, $144,160 (original cost) - $49,084 (accumulated depreciation) = $95,076. Since the equipment was sold for $38,220, which is less than the book value, Cullumber Limited has a loss on the sale of equipment. The journal entry to record the sale is:

1. Debit Cash $38,220
2. Debit Accumulated Depreciation - Equipment $49,084
3. Debit Loss on Sale of Equipment $56,856
4. Credit Equipment $144,160