Equipment acquired on January 6 at a cost of $375,000 has an estimated useful life of 20 years and an estimated residual value of $25,000.
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 $300,000, journalize the entry to record the sale.
d. Assuming that the equipment had been sold on January 3 of Year 4 for $325,000 instead of $300,000, journalize the entry to record the sale.
Answer:
a. Year 1 depreciation expense: $17,500 [($375,000 – $25,000) ÷ 20]
Year 2 depreciation expense: $17,500
Year 3 depreciation expense: $17,500
b. $322,500 [$375,000 – ($17,500 × 3)]
c. Year 4
Jan. 3 Cash300,000
Accumulated Depreciation—Equipment 52,500
Loss on Sale of Equipment 22,500
Equipment375,000
d. Year 4
Jan. 3 Cash325,000
Accumulated Depreciation—Equipment 52,500
Equipment375,000
Gain on Sale of Equipment2,500