Question

New morning bakery is in the process of closing its operations. it sold its two-year-old bakery ovens to great harvest bakery for $670,000. the ovens originally cost $877,000, had an estimated service life of 10 years, had an estimated residual value of $57,000, and were depreciated using straight-line depreciation. Record the sale of the ovens at the end of the second year.

Answer 1

To record the sale of the ovens, calculate the accumulated depreciation to find the book value.

The ovens had a loss on sale of $43,000, which is recorded in the journal along with the cash received and the reversal of the ovens' book value and accumulated depreciation.

Step-by-step explanation:

To record the sale of the ovens at the end of the second year, we first need to calculate the accumulated depreciation on the ovens to determine the book value at the time of sale. The ovens originally cost $877,000 with a residual value of $57,000 and a service life of 10 years.

Using straight-line depreciation, the annual depreciation expense is calculated as (Cost - Residual Value) / Service Life, which in this case is ($877,000 - $57,000) / 10, equalling $82,000 per year. Over two years, the accumulated depreciation is $82,000 x 2 = $164,000. The book value of the ovens at the time of sale is therefore $877,000 - $164,000 = $713,000.

The ovens were sold for $670,000, so the loss on sale is calculated by subtracting the sale price from the book value: $713,000 - $670,000 = $43,000 loss. The journal entries to record the sale are:

• Debit Cash for $670,000
• Debit Accumulated Depreciation for $164,000
• Credit Bakery Ovens for $877,000
• Debit Loss on Sale of Ovens for $43,000