Question

Oregon Adventures purchased equipment at the beginning of 2012 for $80,000. They sold the equipment at the end of 2014 for $45,000. If the expected life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment?

Group of answer choices

Credit Equipment $5,000.

Credit Accumulated Depreciation $40,000.

Credit Gain $5,000.

Debit Loss $5,000.

Answer 1

Answer: Debit Loss $5,000

Working:

• 1) Straight line method:
• Depreciation Expense = (Cost of the asset - Salvage Value)/Number of years of useful life
• = ($80,000 - $10,000) / 7 years
• = $10,000
• Depreciation under straight-line method is same for all years
• Book value = Cost of the asset – Accumulated depreciation
• Accumulated depreciation from January 1,2012 – December 31,2014 = 3 years
• Accumulated depreciation = $10,000*3years = $30,000
• So book value at December 31,2014:$80,000-$30,000 = $50,000
• But sold for $45,000 so there is loss of $5,000

General journal	Debit	Credit
Cash	$       45,000
Loss on sale of equipment	$          5,000
Accumulated Depreciation	$        30,000
Equipment		$        80,000
(Entry to record sale of equipment for loss)