Question

Bale of Equipment Equipment was acquired at the beginning of the year at a cost of $40,000. The equipment was depreciated using the double-declining balance method based on an estimated useful fe often years and an estimated esidual value of $780 a. What was the depreciation for the first year? b. Assuming the equipment was sold at the end of year 2 for $9,240, determine the gain or loss on the sale of the equipment. c. Journalize the entry to record the sale. If an amount box does not require an entry, leave it It blank Previous

Answer 1

Solution:

a. CALCULATION OF DEPRECIATION FOR THE FIRST YEAR

Double-Declining balance method:

Double-declining balance rate =          (100 percent / 10) x 2

                                                =          20%

Depreciation                            =          Acquisition cost x Double-declining balance rate

                                                =          $ 40,000 x 20%

                                                =          $ 8,000

Hence, Depreciation for the first year equals to $ 8,000.

b. COMPUTATION OF GAIN OR LOSS ON THE SALE OF THE EQUIPMENT

Gain or Loss on Sale of Asset =          Sale Price – Book value at the time of sale

                                                =          $ 9,240 - $ 25,600

                                                =          ($ 16,360)

There would be a loss on the sale of equipment of $ 16,360.

Working Note: Computation of book value at the time of sale i.e. end of the year 2

Book value at the end of year 2           =          Acquisition cost – Depreciation for the year 1 and 2

   =          $ 40,000 – ($ 8,000 + $ 6,400)

=          $ 25,600

Depreciation for the year 2      =          Book value at beginning of year 2 x depreciation rate

                                                =          ($ 40,000 - $ 8,000) x 20%

                                                =          $ 6,400

c. JOURNAL ENTRY TO RECORD THE SALE

General Journal Credit Post. Ref. Dr. Date Account Title and Explanation Year 2 Cash A/C Accumulated Depreciation - Equipment A/c Dr. Loss on Sale of Equipment Alc Dr. To Equipment Alc (For sale of equipment) Debit (S) 9,240 14,400 16,360 40,000