Question

Mercury Inc. purchased equipment in 2019 at a cost of $400,000. The equipment was expected to produce 700,000 units over the next five years and have a residual value of $50,000. The equipment was sold for $210,000 part way through 2021. Actual production in each year was: 2019 = 100,000 units; 2020 = 160,000 units; 2021 = 80,000 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 $245,000, calculate the gain or loss on the sale.
4. Prepare the journal entry to record the sale in requirement 3.

Answer 1

Answer 1:

Sale value		210000
Less: Book value:
Cost of equipment	400000
Accumulated depreciation	170000	230000
Gain (Loss) on sale of equipment		-20000

Working note:

Calculation of depreciation expense per unit:

Cost = 400000

Residual value = 50000

Depreciable value (400000-50000) = 350000

Expected production = 700000

Depreciation expense per unit = Depreciable value / Expected production

= 350000 / 700000 = 0.50 per unit

Calculation of Accumulated depreciation:

Depreciation expense for 2019 (100000 * 0.50) = 50000

Depreciation expense for 2020 (160000 * 0.50) = 80000

Depreciation expense for 2021 (80000 * 0.50) = 40000

Accumulated depreciation = 170000

Answer 2:

Date	Account title and explanation	Debit	Credit
2021	Cash	210000
	Accumulated depreciation	170000
	Loss on sale of equipment	20000
	Equipment		400000
	(to record sale of equipment)

Answer 3:

Sale value		245000
Less: Book value:
Cost of equipment	400000
Accumulated depreciation	170000	230000
Gain (Loss) on sale of equipment		15000

Answer 4:

Date	Account title and explanation	Debit	Credit
2021	Cash	245000
	Accumulated depreciation	170000
	Equipment		15000
	Gain on sale of equipment		400000
	(to record sale of equipment)

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