Question

Sale of Equipment:

Equipment was acquired at the beginning of the year at a cost of $600,000. The equipment was depreciated using the double-declining-balance method based on an estimated useful life of 16 years and an estimated residual value of $60,000.

a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the second year for $480,000, determine the gain or loss on the sale of the equipment.
c. Journalize the entry on December 31 to record the sale. If an amount box does not require an entry, leave it blank.

a) $37,500
b) $75,000
c) $120,000
d) $150,000

Answer 1

The depreciation for the first year is $37,500. The loss on the sale of the equipment is $45,000. The journal entry to record the sale would include debiting the cash account for $480,000, crediting the equipment account for $600,000, and debiting the loss on sale of equipment account for $45,000.

Step-by-step explanation:

The depreciation for the first year can be calculated using the double-declining-balance method. The formula for this method is: Depreciation Expense = (Book Value - Residual Value) / Useful Life. In this case, the book value is the cost of the equipment minus the accumulated depreciation.

So, the depreciation for the first year would be:

Depreciation Expense = ($600,000 - $60,000) / 16 = $37,500

To determine the gain or loss on the sale of the equipment, we need to compare the selling price with the book value of the equipment at the time of the sale. The book value can be calculated as the cost of the equipment minus the accumulated depreciation:

Book Value = $600,000 - (1st year depreciation + 2nd year depreciation)

Since the equipment was sold at the end of the second year, the book value would be:

Book Value = $600,000 - ($37,500 + $37,500) = $525,000

The gain or loss can then be calculated as:

Gain or Loss = Selling Price - Book Value = $480,000 - $525,000 = -$45,000

Since the result is negative, this indicates a loss of $45,000 on the sale of the equipment.

The journal entry to record the sale would include debiting the cash account for $480,000, crediting the equipment account for $600,000, and debiting the loss on sale of equipment account for $45,000.