Question

Howarth Manufacturing Company purchased equipment on June 30, 2017, at a cost of $95,000. The residual value of the equipment was estimated to be $5,000 at the end of a five-year life. The equipment was sold on March 31, 2021, for $21,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:
1. Prepare the journal entry to record the sale.
2. Assuming that Howarth had instead used the double-declining-balance method, prepare the journal entry to record the sale.

Answer 1

1. Depreciation under Straight line method = (Cost - Residual value) / Estimated useful life

= ($95,000 - $5,000) / 5

= $18,000

	Depreciation expense
2017	$9,000 ($18,000*6/12)
2018	$18,000
2019	$18,000
2020	$18,000
2021	$4,500 ($18,000*3/12)
	$67,500

Journal entry

March 31, 2021	Cash	$21,000
	Accumulated depreciation	$67,500
	Loss on sale	$6,500
	Equipment		$95,000

2. Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Useful life * 2

	Depreciation expense
2017	$19,000 [($95,000-$0)/5*2*6/12]
2018	$30,400 [($95,000-$19,000)/5*2]
2019	$18,240 [($95,000-$19,000-$30,400)/5*2]
2020	$10,944 [($95,000-$19,000-$30,400-$18,240)/5*2]
2021	$1,642 [($95,000-$19,000-$30,400-$18,240-$10,944)/5*2*3/12]
	$80,226

* 2021 depreciation is rounded to 0 decimal places.

Journal entry

March 31, 2021	Cash	$21,000
	Accumulated depreciation	$80,226
	Gain on sale		$6,226
	Equipment		$95,000