Question

QUESTION 4 (10 marks) On April 1, 2015, Thunderbird Co sold a piece of equipment that had cost $55,00 piece of equipment that had cost $35,000 on January 1, 2011. The equipment had a residual value of $5,000, a useful life 10 years, and double balance depreciation at twice the straight-line rate was used. On December 31, 2014, accumulated depreciation was $20.664. The asset was sold for $14,200. Prepare the journal entry to record depreciation up to the date of disposal of the equipment, and the journal entry to record the disposal of the equipment. Show your calculation for marks

Answer 1

Journal entries :

Date	accounts and explanation	Debit	Credit
Apr 1, 2015	Depreciation	$717
	Accumulated depreciation		$717
	(To record depreciation expense till the date of disposal)
Apr 1, 2015	Cash	$14200
	Accumulated depreciation	$21381
	Equipment		$35000
	Profit on disposal		$581
	(To record disposal of equipment)

Note 1 : calculation of depreciation expense for 2015 -

Depreciation expense per year = (cost - accumulated depreciation) × depreciation rate × number months used in 2015.

Where,

depreciation rate under double declining balance method  = depreciation rate under straight line method × 2.

Depreciation per year under straight line method = [(cost - salvage value)/useful life ]

= [($35000 - $5000)/10 ]

= [$30000/10]

= $3000

Depreciation rate under straight line method =

= ($3000/$30000)×100

= 10%

Depreciation rate under double declining balance method

= 10% × 2

= 20%

Therefore,

Depreciation for 2015 = ($35000 - $20664) × 20% × 3/12

= $14336 × 20% × 3/12

= $2867.2 × 3/12

= $717

Note 2 : calculations of profit / (loss) on sale -

Profit /(loss) = Sale price - book value of asset on the date of disposal.

= $14200 - [ cost - accumulated depreciation till the date of disposal }

= $14200 - [$3500 - ($20664+$717)]

= $14200 - [$35000 - $21381]

= $14200 - $13619

= $581

It is profit