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Chapter 9: Problem 11

Sale of Equipment Prepare the journal entry for the following transactions: (1) Geysler Company sold some old equipment that initially cost \(\$ 30,000\) and had \(\$ 25,000\) of accumulated depreciation and received cash in the amount of \(\$ 2,000\). (2) Assume the same facts except Geysler received \(\$ 8,000\).

Short Answer

Expert verified
1) Entry: Debit Cash $2,000, Acc. Dep. $25,000, Loss $3,000; Credit Equip. $30,000 2) Entry: Debit Cash $8,000, Acc. Dep. $25,000; Credit Equip. $30,000, Gain $3,000.

Step by step solution

01

Calculate Book Value of Equipment

To find the book value of the equipment, subtract the accumulated depreciation from the initial cost. \( \text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = \\(30,000 - \\)25,000 = \$5,000 \).
02

Determine Gain or Loss for Transaction 1

Compare the cash received to the book value to find any gain or loss. For the first transaction, \(\text{Cash Received} = \\(2,000\). \(\text{Book Value} = \\)5,000\). Since \\(2,000 < \\)5,000, there is a loss. The loss amount is \( \text{Loss} = \text{Book Value} - \text{Cash Received} = \\(5,000 - \\)2,000 = \$3,000 \).
03

Journal Entry for Transaction 1

Record the journal entry for the sale of the equipment. - Debit Cash: \( \\(2,000 \)- Debit Accumulated Depreciation: \( \\)25,000 \)- Debit Loss on Sale of Equipment: \( \\(3,000 \)- Credit Equipment: \( \\)30,000 \)
04

Determine Gain or Loss for Transaction 2

For the second transaction, cash received is \\(8,000. With a book value of \\)5,000, \\(8,000 > \\)5,000, resulting in a gain. The gain amount is \( \text{Gain} = \text{Cash Received} - \text{Book Value} = \\(8,000 - \\)5,000 = \$3,000 \).
05

Journal Entry for Transaction 2

Record the journal entry for the second sale. - Debit Cash: \( \\(8,000 \)- Debit Accumulated Depreciation: \( \\)25,000 \)- Credit Equipment: \( \\(30,000 \)- Credit Gain on Sale of Equipment: \( \\)3,000 \)

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Accumulated Depreciation
Accumulated depreciation is a foundational accounting concept. It's the total amount of depreciation expense that has been allocated to a specific asset since it was acquired. It essentially reflects the wear and tear or obsolescence of the asset over time.
For example, when a piece of equipment costs \( \\(30,000 \), and it has \( \\)25,000 \) in accumulated depreciation, it means that \( \$25,000 \) worth of the asset's value has been used up or has depreciated since its purchase.
  • This is an important measure for understanding how much value remains in an asset over time.
  • Each year, a portion of the asset's cost is "written off" as depreciation. This is recorded as an expense on the income statement and added to the accumulated depreciation on the balance sheet.
Understanding accumulated depreciation helps companies manage their assets better and tells investors and stakeholders about how effectively the company is using its assets.
Book Value
The book value of an asset is a key figure in accounting, representing the net value of an asset on the balance sheet. This is calculated by subtracting the accumulated depreciation from the asset's original cost.
Using the provided example: if the equipment was initially \( \\(30,000 \), and it has \( \\)25,000 \) in accumulated depreciation, then the book value is \( \$5,000 \).
  • The book value can indicate if the asset is nearing the end of its useful life, as a lower book value means more of its value has been depreciated.
  • It is also used in calculating gains or losses when selling off assets.
The book value helps management determine when to replace equipment or decide on selling strategies.
Gain or Loss on Sale
Figuring out the gain or loss on the sale of an asset helps assess the financial impact of selling an asset. When selling an asset, you compare the sale price received to its book value.
If cash received from the sale is higher than the book value, you have a gain. Conversely, if it's lower, you have a loss.
  • In Transaction 1, receiving \( \\(2,000 \) when the book value is \( \\)5,000 \) creates a \( \\(3,000 \) loss.
  • In Transaction 2, receiving \( \\)8,000 \) with a \( \\(5,000 \) book value results in a \( \\)3,000 \) gain.
This comparison helps determine whether a company makes or loses money on the transaction, which is crucial for strategic financial planning.
Debit and Credit Transactions
Debits and credits are the backbone of accounting. They are used to track changes in accounts due to financial events, ensuring the accounting equation (Assets = Liabilities + Owner's Equity) stays balanced.
For sales entries:
  • Debit cash for the amount received shows an increase in company assets.
  • Debit accumulated depreciation ensures this expense is acknowledged.
  • Debit loss on sale is recorded if there is a financial loss in the transaction.
  • Credit equipment to decrease the asset's account, reflecting its sale.
  • Credit gain on sale when there's a profit.
Mastering debits and credits is essential for cash flow management and helps in preparing accurate financial statements.

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Most popular questions from this chapter

Goodwill Impairment Bruce Farms Equipment Company had goodwill valued at \(\$ 80\) million on its balance sheet at year-end. A review of the goodwill by the company's CFO indicated that the goodwill was impaired and was now only worth \(\$ 45\) million. Prepare a journal entry to record the goodwill impairment on the books of the company.

Return on Assets and Asset Turnover Last year, the Miller Company reported a return on assets of 15 percent and an asset turnover of 1.6. In the current year, the company reported a return on assets of 19 percent but an asset turnover of only \(1.2\). If sales revenue remained unchanged from last year to the current year, what would explain the two ratio results?

Asset Turnover The Kingwood Company reported sales revenue of \(\$ 520,000\) and average total assets of \(\$ 500,000\). Calculate the company's asset turnover.

What is the benefit of accelerating depreciation for income tax purposes when the total depreciation taken is no more than if straight-line depreciation were used?

Revision of Depreciation People's Clinic purchased a special machine for use in its laboratory on January 2,2016 . The machine cost \(\$ 100,000\) and was expected to last 10 years. Its salvage value was estimated to be \(\$ 6,000\). By early 2018 , it was evident that the machine will be useful for a total of only seven years. The salvage value after seven years was estimated to be \(\$ 7,500\). People's Clinic uses straight-line depreciation. Compute the proper depreciation expense on the machine for \(2018 .\)
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