Question

Howarth Manufacturing Company purchased equipment on June 30, 2017, at a cost of $160,000. The residual value of the equipment was estimated to be $10,000 at the end of a five-year life. The equipment was sold on March 31, 2021, for $43,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:
1. Prepare the journal entry to record the sale.
2. Assuming that Howarth had instead used the double-declining-balance method, prepare the journal entry to record the sale.

Answer 1

1.

Depreciation under Straight line method = (Cost - Residual value) / Estimated useful life

= ($160,000 - $10,000) / 5

= $30,000

	Depreciation expense
2017	$15,000 ($30,000*6/12)
2018	$30,000
2019	$30,000
2020	$30,000
2021	$7,500 ($30,000*3/12)
	$112,500

March 31, 2021	Cash	$43,000
	Accumulated depreciation	$112,500
	Loss on sale	$4,500
	Equipment		$160,000

2.

Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Useful life * 2

	Depreciation expense
2017	$32,000 [($160,000 - $0)/5*2*6/12]
2018	$51,200 [($160,000-$32,000)/5*2]
2019	$30,720 [($160,000-$32,000-$51,200)/5*2]
2020	$18,432 [($160,000-$32,000-$51,200-$30,720)/5*2]
2021	$2,765 [($160,000-$32,000-$51,200-$30,720-$18,432)/5*2*3/12]
	$135,117

March 31, 2021	Cash	$43,000
	Accumulated depreciation	$135,117
	Gain on sale		$18,117
	Equipment		$160,000