Question

Strawberry Fields purchased a tractor at a cost of $40,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $6,000 residual value.

1. What was the gain or loss on the sale?2. Record the sale using a general journal entry.

Answer 1

Answer:

1.Loss on sale 1,400

2.Dr Cash 25,000

Dr Accumulated Depreciation 13,600

Dr Loss on sale 1,400

Cr Equipment - Tractor 40,000

Step-by-step explanation:

1.Calculation of the gain or loss on the sale of Strawberry Fields

Using this formula

Depreciation per year = (Cost - Salvage value)/Useful life

= (40,000-6,000)/5

=34,000/5

= 6,800 per year

The Book value after two years will be:

40,000 - (6,800*2)

=40,000-13,600

=26,400

Gain(Loss) = Cash received - Book value

= 25,000 - 26,400

Loss on sale 1,400

2.Record of the sale using a general journal entry

Dr Cash 25,000

Dr Accumulated Depreciation 13,600

Dr Loss on sale 1,400

Cr Equipment - Tractor 40,000