Question

Manchester Company sells equipment on June 1, 2021, for $222,400 cash. Manchester incurred $1,280 of removal and selling costs on disposal. The equipment cost $400,000 when it was purchased on January 2, 2018. Its estimated residual value and useful life were $64,000 and 10 years, respectively. Manchester uses straight-line depreciation and records annual depreciation on each December 31.a. Prepare the journal entries needed to record the asset disposal on June 1, 2021.b. Record the journal entries if the equipment were abandoned (zero fair value) on June 1, 2021.Note: Record debit accounts in alphabetical order using the first letter of the account name.

Answer 1

A. June 1, 2021

Dr Depreciation Expense $14,000

Cr Accumulated Depreciation-Equipment $14,000

June 1, 2021

Dr Cash $221,120

Dr Accumulated Depreciation-Equipment $114,800

Dr Loss on Sale of Equipment $64,080

Cr Equipment $400,000

June 1, 2021

Dr Depreciation Expense $14,000

Cr Accumulated Depreciation-Equipment $14,000

June 1, 2021

Dr Accumulated Depreciation-Equipment $114,800

Dr Loss on Sale of Equipment $285,200

Cr Equipment $400,000

Step-by-step explanation:

a. Preparation of the journal entries needed to record the asset disposal on June 1, 2021

First step is to calculate the Annual depreciation under straight line using this formula

Annual depreciation under straight line = (Cost - Residual Value)/Useful life

Let plug in the formula

Annual depreciation under straight line= ($400,000 - $64,000)/10 yrs

Annual depreciation under straight line = $33,600 per year

Second step is to calculate the Depreciation charged from Jan 2, 18 to Dec 31, 2020

Depreciation charged from Jan 2, 18 to Dec 31, 2020 = $33,600*3 yrs

Depreciation charged from Jan 2, 18 to Dec 31, 2020 = $100,800

Third step is to calculate the Depreciation from Jan 1, 2021 to June 1, 2021

Depreciation from Jan 1, 2021 to June 1, 2021

Depreciation from Jan 1, 2021 to June 1, 2021= $33,600*5/12 = $14,000

Now let Prepare the Journal entries

June 1, 2021

Dr Depreciation Expense $14,000

Cr Accumulated Depreciation-Equipment $14,000

(To update depreciation)

June 1, 2021

Dr Cash ($222,400-$1,280) $221,120

Dr Accumulated Depreciation-Equipment ($100,800+$14,000) $114,800

Dr Loss on Sale of Equipment (400,000-221,120-$114,800) $64,080

Cr Equipment $400,000

(To record the disposal of equipment)

b) Preparation to Record the journal entries if the equipment were abandoned on June 1, 2021.

June 1, 2021

Dr Depreciation Expense $14,000

Cr Accumulated Depreciation-Equipment $14,000

(To update depreciation)

June 1, 2021

Dr Accumulated Depreciation-Equipment (100,800+$14,000) $114,800

Dr Loss on Sale of Equipment ($400,000-$114,800) $285,200

Cr Equipment $400,000

(To record the disposal of equipment)