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Chapter 9: Problem 7

Sale of Plant Asset Shannon Company has equipment that originally cost \(\$ 68,000\). Depreciation has been recorded for six years using the straight-line method, with a \(\$ 9,000\) estimated salvage value at the end of an expected eight-year life. After recording depreciation at the end of six years, Shannon sells the equipment. Prepare the journal entry to record the equipment's sale for: a. \(\$ 30,000\) cash. b. \(\$ 23,750\) cash. c. \(\$ 21,000\) cash.

Short Answer

Expert verified
a. Gain of $6,250. b. No gain or loss. c. Loss of $2,750.

Step by step solution

01

Calculate Annual Depreciation

To find the annual depreciation, use the formula \( \text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}} \). Substitute the given values: \( \text{Annual Depreciation} = \frac{68,000 - 9,000}{8} = 7,375 \).
02

Calculate Accumulated Depreciation After Six Years

Multiply the annual depreciation by six to find the accumulated depreciation after six years: \( \text{Accumulated Depreciation} = 7,375 \times 6 = 44,250 \).
03

Determine Book Value After Six Years

Subtract the accumulated depreciation from the original cost to find the book value. Book Value = Original Cost - Accumulated Depreciation. Book Value = 68,000 - 44,250 = 23,750.
04

Record Sale for $30,000 Cash

The cash received is greater than the book value, resulting in a gain. Gain = Cash Received - Book Value = 30,000 - 23,750 = 6,250. Journal Entry: - Debit Cash: 30,000 - Debit Accumulated Depreciation: 44,250 - Credit Equipment: 68,000 - Credit Gain on Sale of Equipment: 6,250.
05

Record Sale for $23,750 Cash

Here, the cash received equals the book value, resulting in no gain or loss. Journal Entry: - Debit Cash: 23,750 - Debit Accumulated Depreciation: 44,250 - Credit Equipment: 68,000.
06

Record Sale for $21,000 Cash

The cash received is less than the book value, resulting in a loss. Loss = Book Value - Cash Received = 23,750 - 21,000 = 2,750. Journal Entry: - Debit Cash: 21,000 - Debit Accumulated Depreciation: 44,250 - Debit Loss on Sale of Equipment: 2,750 - Credit Equipment: 68,000.

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Key Concepts

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

Depreciation Calculation
Depreciation is the method used to allocate the cost of a tangible asset over its useful life and account for the decrease in its value. For Shannon Company, we calculated the annual depreciation using the straight-line method. This approach is straightforward and involves equal expense amounts across each period of the asset's life. Given the equipment's original cost of \(68,000, a salvage value of \)9,000, and an 8-year lifespan, the annual depreciation is found by dividing the difference between cost and salvage value by the useful life:\[ \text{Annual Depreciation} = \frac{\\(68,000 - \\)9,000}{8} = \$7,375 \]This computation helps reflect the asset's consuming value over each year, and it's crucial for properly documenting in accounting records.
Book Value Computation
Book value represents the value of the asset as recorded on the balance sheet, after accounting for depreciation. To determine the book value after six years, it's essential to calculate how much of its cost the asset has already lost.First, we calculate the accumulated depreciation, which sums up yearly depreciation over the six years:\[ \text{Accumulated Depreciation} = 7,375 \times 6 = \\(44,250 \]Next, subtract this accumulated depreciation from the original cost of the asset:\[ \text{Book Value} = \\)68,000 - \\(44,250 = \\)23,750 \]The book value of $23,750 is essential for evaluating whether there was a gain or loss once the asset is sold.
Gain and Loss on Asset Sale
When an asset is sold, the difference between the cash received and its book value will determine whether there is a gain or a loss.
  • If the cash received is greater than the book value, it results in a gain. For example, Shannon sold the asset for $30,000, which was higher than the book value of $23,750, resulting in a $6,250 gain.
  • If the cash received equals the book value, no gain or loss occurs. This was the situation when the asset was sold for $23,750.
  • When the cash received is less than the book value, it results in a loss. Shannon experienced a $2,750 loss when selling the asset for $21,000, which was below its $23,750 book value.
Understanding these outcomes helps in proper financial recording and reflecting the correct economic consequences of asset sales. The idea is to accurately report these changes in financial statements.

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Most popular questions from this chapter

Natural 91影视 The Stein Company acquires a copper mine at the cost of \(\$ \$ 950,000\) on January 1. Along with the purchase price Stein pays additional costs associated with development of \(\$ 75,000\). Stein expects the mine will have a salvage value of \(\$ 125,000\) once all the silver has been mined. Best estimates are that the mine contains 300,000 tons of ore. Required a. Prepare the entry to record the purchase of the silver mine. b. Prepare the December 31 year-end adjusting entry to record depletion if 40,000 tons of ore are mined and all the ore is sold. c. Prepare the December 31 year-end adjusting entry to record depletion if 40,000 tons of ore are mined but only 10,000 tons of the ore are sold.

Impairment Loss On July 1, 2015, Karen Company purchased equipment for \(\$ 325,000\); the estimated useful life was 10 years and the expected salvage value was \(\$ 40,000\). Straight-line depreciation is used. On July 1, 2019, economic factors cause the market value of the equipment to decrease to \(\$ 90,000\). On this date, Karen evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be \(\$ 195,000\). a. Is the equipment impaired at July 1, 2019? Explain. b. If the equipment is impaired at July 1,2019 , calculate the amount of the impairment loss. c. If the equipment is impaired at July 1, 2019, prepare the journal entry to record the impairment loss.

On the first day of the current year, Griffin Company sold equipment for less than its book value. Which of the following is part of the journal entry to record the sale? a. A debit to Equipment b. A credit to Accumulated Depreciation-Equipment c. A credit to Gain on Sale of Plant Assets d. A debit to Loss on Sale of Plant Assets

Under what circumstances is goodwill recorded?

When is a plant asset considered to be impaired? How is an impairment loss calculated?
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