Final answer:
The annual depreciation expense for the equipment is $19,500 using the straight-line method. The book value of the equipment at the beginning of Year 4 is $366,500. As for the sale on January 3 of Year 4, the journal entry would include debiting cash for $370,000, crediting Accumulated Depreciation for $58,500, crediting Equipment for $425,000, and crediting Gain on Sale of Equipment for $3,500.
Step-by-step explanation:
The student asks for the calculation of annual depreciation expense for the first three years and the book value at the beginning of Year 4 for a piece of equipment using the straight-line method of depreciation, as well as how to journalize the entry of a sale of the equipment in Year 4.
To calculate the annual depreciation expense, we subtract the residual value from the cost and then divide by the useful life of the asset:
Annual Depreciation Expense = (Cost - Residual Value) / Useful Life
Annual Depreciation Expense = ($425,000 - $35,000) / 20
Annual Depreciation Expense = $390,000 / 20
Annual Depreciation Expense = $19,500
For the book value at the beginning of Year 4:
Book Value at the beginning of Year 4 = Cost - (Depreciation Expense * 3)
Book Value at the beginning of Year 4 = $425,000 - ($19,500 * 3)
Book Value at the beginning of Year 4 = $425,000 - $58,500
Book Value at the beginning of Year 4 = $366,500
The journal entry for the sale on January 3 of Year 4 would be:
Date: January 3
Account: Cash
Debit: $370,000
Account: Accumulated Depreciation-Equipment
Credit: $58,500
Account: Equipment
Credit: $425,000
Account: Gain on Sale of Equipment
Credit: $3,500