Question

Stevenson Company purchased equipment for $250,000 on January 1, 2010. The estimated salvage value is $50,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On July 1, 2013 Stevenson sold the equipment for $100,000. The journal entry to record the sale of the equipment will include.

Answer 1

Answer: The following journal entries would be recorded upon disposal of the equipment:

                                                                              Debit                       Credit

Cash                                                                   $100,000

Accumulated depreciation                               $140,000

Equipment                                                                                        $250,000

Loss on disposal of asset                                   $10,000

Explanation: Using the straight-line method of depreciation, the following formula applies: (Historical cost - Salvage value) / No of years

Depreciation = ($250,000 - $50,000) / 5 years = $40,000 yearly

Accumulated depreciation (January 1, 2010 - July 1, 2013) for three and half years is $140,000 (3.5 years * $40,000). This means that the equipment had a net book value (NBV) of $110,000 as at the time of disposal. So, the above entries would eliminate the asset in the books and recognise the loss on disposal (sales proceed was less than the NBV).