Equipment acquired on January 6 at a cost of $459,240, has an estimated useful life of 19 years and an estimated residual value of $62,805.

A. What was the annual amount of depreciation for the Years 1-3 using the straight-line method of depreciation?
B. What was the book value of the equipment on January 1 of Year 4?
C. Assuming that the equipment was sold on January 3 of Year 4 for $379,920, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles.
D. Assuming that the equipment had been sold on January 3 of Year 4 for $410,485 instead of $379,920, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles.

B. Book Value of an asset is the residual between accumulated depreciation from its original cost. First, we must compute the accumulated depreciation for 3 years (year 1 to year 3). Annual depreciation of $20,865 x 3 years = $62,595.

So the cost of $459,240 less the accumulated depreciation of $62,595, book value of the equipment at January 1 of year 4 is $396,645.

C. Book value of the equipment at the time of sale is $396,645 (same as computed above). The proceeds is less than the book value of the equipment, therefore there is loss on sale.

$396,645 - $379,920 = $16,725 (loss on sale)

ENTRY:

Debit Cash $379,920

Debit Accumulated depreciation $62,595

Debit loss on sale $16,725

Credit $Equipment $459,240

*Equipment must be credited at original cost on sale transaction and we must closed its accumulated depreciation along with it by debiting it.

D. This time, the proceeds is greater than the book value of the equipment, therefore a gain on sale happens.

Proceeds on sale $410,485

Less: Book value of $396,645

———————————————-

Gain on sale $13,840

ENTRY:

Debit Cash $410,485

Debit accumulated depreciation $62,595

Credit Equipment $459,240

Credit Gain on sale $13,840

*Equipment is credited at cost and accumulated depreciation is debited to close it.