Question

A company purchased a computer system on January 2, 2010 for $1,600,000. The company used the straight-line depreciation method with an estimated useful life of 6 years and a residual value of $130,000. The company prepares financial statements at December 31. Assume the company decides to sell the computer system on July 1, 2012 for $1,000,000. Which of the following is not true concerning the journal entry(ies) required on July 1 is not correct?
a. The Equipment asset account must be credited for $1,600,000 to record the sale.
b. The loss on the sale is $12,500.
c. Accumulated Depreciation is debited for $612,500 in the entry to record the sale.
d. The depreciation expense must be recorded for 6 months, January 1 to July 1.

Answer 1

Answer: b. The loss on the sale is $12,500.

Explanation:

The value of the equipment on the date it was sold is:

= Cost price - Accumulated depreciation

Accumulated depreciation = Depreciation * Number of years of service

Depreciation = (1,600,000 - 130,000) / 6 years useful life

= $245,000

Number of years of service is 2.5 years because the asset was sold on July 1, 2012.

Accumulated depreciation = 245,000 * 2.5

= $612,500

Value at date of sale:

= 1,600,000 - 612,500

= $987,500

Gain (loss) on sale = Selling price - Value at date of sale

= 1,000,000 - 987,500

= $12,500

The $12,500 is a gain not a loss.