Question

Asset Disposal Assume that Tsua Enterprises purchased an asset on January 1, 2015, for $60,000. The asset had an estimated life of six years and an estimated residual value of $6,000. The company used the straight-line method to depreciate the asset. Assume that Tsua Enterprises sold the asset on July 1, 2017, and received $16,000 cash and a note for an additional $14,000. Required: 1. Identify and analyze the effect of the transaction for depreciation for 2017. Activity Accounts Statement(s) How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, L.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Liabilities Equity Revenues + Assets

Answer 1

1) Depreciation per year using straight line method = (Cost - Salvage Value)/Useful Life

= ($60,000 - $6,000)/6 yrs = $9,000 per year

Depreciation charged for 2015 and 2016 = $9,000*2 = $18,000

Depreciation for the year 2017 up to July 1 = $9,000*6/12 = $4,500

Journal entry to record depreciation for the year 2017 (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
July 1, 2017	Depreciation expense	4,500
	Accumulated depreciation		4,500
	(To record the depreciation expense)

The effect of the above transaction is shown as follows:- (Amounts in $)

Activity	Operating Activity
Accounts	Depreciation expense, Accumulated depreciation
Statement(s)	Income Statement and Balance Sheet

Depreciation is part of cash flows from operating activities as it is added to net income under indirect method of cash flows.

Balance Sheet							Income Statement
Assets		=	Liabilities		+	Stockholder's Equity	Revenues		-	Expenses
Accumulated Depreciation	-4,500									Depreciation Expense	4,500
Cash	16,000
Notes Receivable	14,000
Equipment	-37,500(60,000-22,500)									Loss on sale of asset	7,500

Loss on sale of asset is $7,500 (i.e. sale price, $30,000 - net cost of asset, $37,500) which is debited to expenses. Total Accumulated depreciation balance on July 1, 2017 is $22,500 ($18,000+$4,500).

2) The gain or loss should appear in the non operating section of the income statement to indicate that it is not part of the normal activity of the company.