Question

On January 1, 2016, Horton Inc. sells a machine for $23,000. The machine was originally purchased on January 1, 2014 for $40,000. The machine was estimated to have a useful life of 5 years and a residual value of $0. Horton uses straight-line depreciation. In recording this transaction:

Answer 1

The entry to record this transaction will be,

Accumulated depreciation 16000

Cash 23000

Loss on disposal 1000

Machine 40000

Step-by-step explanation:

The straight line method of depreciation charges a constant depreciation expense throughout the useful life of the asset. The formula to calculate depreciation expense per year under this method is,

Depreciation expense per year = (Cost - Residual value) / Estimated useful life of the asset

Depreciation expense per year = (40000 - 0) / 5 = $8000 per year

The net book value of the machine on 1 January 2016 = 40000 - (8000 * 2)

NBV = $24000

As the machine was sold for $23000, the loss on disposal will be,

Loss on disposal = 23000 - 24000 = -1000 or $1000 loss