Question

1. Comment on the validity...

2. Equipment was acquired at the....

1. Comment on the validity of the following statements. "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." 2. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was depreciated using the straight-line method based upon an estimated useful life of 6 years and an estimated residual value of $7,500. a) What was the depreciation expense for the first year? b) Assuming the equipment was sold at the end of the second year for $59,000, determine the gain or loss on sale of the equipment. c) Journalize the entry to record the sale.

Answer 1

Requirement 1

Depreciation is the procedure of assigning to expense the cost of a plant asset over its useful (service) life in a balanced and orderly method. Identifying depreciation for an asset does not cause in the accretion of cash for replacement of the asset. The balance in Accumulated Depreciation denotes the total amount of the asset’s cost that has been charged to expense to date; it is not a cash fund.

Requirement 2

a.Depreciation Expense first year

Depreciation = (Cost - salvage value ) / useful life = ( 75000 - 7500 ) / 6 = $11250

Accumulated depreciation at the end of second year = $11250 x 2 = $22500

b.Sale of Equipment for $59000

Book Value at the end of second year = $75000 - $22500 = $52500

Gain on sale of Equipment = $59000 - $52500 = $6500

c.Record entry:

Cash a/c                         Dr. 59000

Accumulated Depreciation a/c   Dr. 22500

          To Equipment                                    75000

          To Gain on sale of Equipment               6500

(To record sale of Equipment)