Question

Equipment was purchased at a cost of $52,000. It had an estimated useful life of seven years and a residual value of $3,000. Assuming the equipment was sold at the end of Year 6 for $14,000, which of the following will be included in the journal entry? (Assume the straight-line depreciation method.)
(A) a credit to Loss on Sale of Asset
(B) a credit to Cash
(C) a debit to Accumulated Depreciation—Equipment
(D) a debit to Gain on Sale of Asset

Answer 1

D) a debit to gain on Sale of Asset

The transaction is going to be between Accumulated Depreciation account and Gain on Sale of Asset. The Depreciation account would be credited whiles the Gain on Asset account is Debited.

Explanation:

Cost = $52,000

Estimated useful life = 7 years

Residual value = $3,000

Depreciation for each year

($52,000 -$3,000) / 7 years = $7,000

Accumulated Depreciation as at year 6

$7,000 * 6 years = $42,000

Carrying amount as at the end of year 6 is

$52,000 - $42,000 = $10,000

Sales price is $14,000.

Profit or loss on sale

(sales price - carrying amount)

$14,000 - $10,000 = $4,000

Therefore the profit/gain on sale of asset of $4,000 will be debited in the gain on sale of asset account.