Question

Disposal of Fixed Asset

Equipment acquired on January 8, 20Y1, at a cost of $660,000, has an estimated useful life of 20 years and an estimated residual value of $79,200.

a. What was the annual amount of depreciation for the years 20Y1, 20Y2, and 20Y3, using the straight-line method of depreciation? Round annual depreciation to the nearest dollar and use this amount in your follow-on calculations.

	Depreciation expense
20Y1	$________
20Y2	$________
20Y3	$________

b. What was the book value of the equipment on January 1, 20Y4? $____________

For decreases in accounts or outflows of cash, enter your answers as negative numbers. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank.

c. Assuming that the equipment was sold on January 7, 20Y4, for $231,000, illustrate the effects on the accounts and financial statements of the sale.

Statement of Cash Flows Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity __________ + _________ - = _____________ ____________ Jan. 7. __________ _________ _____________ ____________ Statement of Cash Flows Income Statement

d. Assuming that the equipment was sold on January 7, 20Y4, for $924,000 instead of $231,000, illustrate the effects on the accounts and financial statements of the sale.

Statement of Cash Flows	Balance Sheet										Income Statement
	Assets					=	Liabilities	+	Stockholders' Equity
	______	+	_____	-		=	_________		______________
Jan. 7.	______		_____				_________		______________
Statement of Cash Flows										Income Statement

Answer 1

Part A

Annual depreciation = (Cost-residual value)/estimated useful life = (660000-79200)/20 = 29040

	Depreciation expense
20Y1	29040
20Y2	29040
20Y3	29040

Part B

book value of the equipment on January 1, 20Y4 = cost – accumulated depreciation till 20Y3 = 660000-(29040*3) = 572880

Part C

Account titles and explanation	debit	Credit
Cash	231000
Accumulated depreciation – equipment (29040*3)	87120
Loss on sale of equipment	341880
equipment		660000

Statement of cash flows		Balance sheet							Income statement
		assets			=	liabilities	+	Stockholders’ equity
		Cash	+	equipment
Jan. 7		231000		-572880
Statement of cash flows
Investing	231000								Loss on sale of equipment	341880

Part D

Account titles and explanation	debit	Credit
Cash	924000
Accumulated depreciation – equipment (29040*3)	87120
Gain on sale of equipment		351120
equipment		660000

Statement of cash flows		Balance sheet							Income statement
		assets			=	liabilities	+	Stockholders’ equity
		Cash	+	equipment
Jan. 7		924000		-572880
Statement of cash flows
Investing	924000								Gain on sale of equipment	-351120