Question

A machine was purchased at a cost of $52,000. The equipment 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 cash, which of the following will be included in the journal entry? (Assume the straight-line depreciation method.) a.a credit to Cash b.a debit to Accumulated Depreciation—Equipment c.a debit to Gain on Sale of Asset d.a credit to Loss on Sale of Asset

Answer 1

Answer:

The correct answer is b which is a debit to Accumulated Depreciation —Equipment .

Explanation:

1. To understand which accounting entries are to be made, we must first establish whether the machine was disposed at a loss or profit.  

Determining the possible cumulative depreciation value within the assets useful life:

Cumulative depreciation = Cost - Residual value .

Where cost  is  = $ 52,000.

Residual value is =  $3,000.

Depreciation = 52,000 - 3,000 .

Possible cumulative depreciation  value within the assets useful life = $ 49,000.

Yearly depreciation amount = cumulative depreciation  value within the assets useful life / Total useful life

Yearly depreciation amount = $ 49,000 / 7 years.

Yearly depreciation amount = $ 7,000.

Determining whether the Machine was disposed at a loss or profit.

Total depreciation for the 6 years = 7,000 × 6 = $42,000.

Asset disposal price - Machine Book Value = Profit or Loss.

14,000 - 10,000 =  $4,000 Profit.

To recognize the profit from the sale of the machine.

a) We debit cash for the amount received from the sale,

b) We debit all accumulated depreciation arising from utilizing the machine for 6 yrs,

c) We credit the fixed asset,

d) And finally we credit the gain on sale of asset account.

This only leaves option b as the correct answer.