Question

Mercury Inc. purchased equipment in 2019 at a cost of $294,000. The equipment was expected to produce 530,000 units over the next five years and have a residual value of $29,000. The equipment was sold for $150,000 part way through 2021. Actual production in each year was: 2019 - 76,000 units; 2020 121,000 units, 2021 = 61,000 units. Mercury uses units of production depreciation, and all depreciation has been recorded through the disposal date. Required: 1. Calculate the gain or loss on the sale. 2. Prepare the journal entry to record the sale. 3. Assuming that the equipment was instead sold for $179,000, calculate the gain or loss on the sale. 4. Prepare the journal entry to record the sale in requirement 3.

Answer 1

Requirement 1:

Sale value		$150,000
Less: Book value
Cost of equipment	$294,000
Accumulated depreciation	($129,000)	($165,000)
Gain(Loss) on sale of equipment		($15,000)

Requirement 2:

Date	Account title and explanation	Debit	Credit
Year 2021	Cash	$150,000
	Accumulated depreciation	$129,000
	Loss on sale of equipment	$15,000
	Equipment		$294,000
	[To record sale of equipment]

Requirement 3:

Sale value		$179,000
Less: Book value
Cost of equipment	$294,000
Accumulated depreciation	($129,000)	($165,000)
Gain(Loss) on sale of equipment		$14,000

Requirement 4:

Date	Account title and explanation	Debit	Credit
Year 2021	Cash	$179,000
	Accumulated depreciation	$129,000
	Equipment		$294,000
	Gain on sale of equipment		$14,000
	[To record sale of equipment]

Calculations:

Calculations of Depreciation expense per unit:

Cost	$294,000
Residual value	($29,000)
Depreciable value	$265,000
÷ Expected production	530,000 units
= Depreciation expense per unit	$0.50

Calculations of 'Accumulated depreciation':

Depreciation expense for 2019 [76,000 x $0.50]	$38,000
Depreciation expense for 2020 [121,000 x $0.50]	$60,500
Depreciation expense for 2021 [61,000 x $0.50]	$30,500
Accumulated depreciation	$129,000