Chapter 9, Problem 9.8E

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the salvage value is shown as below:

  $\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Salvage value}\right)}{\text{Estimated useful life of the asset}}$

To record: the journal entry for the disposal of the equipment with no salvage value

Explanation of Solution

Record the journal entry for the disposal of the equipment with no salvage value on January 1, 2017.

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
January 1,2017	Accumulated depreciation – Equipment		62,000
	Equipment			62,000
	(To record the disposal of the asset.)

Table (1)

Description:

• Accumulated depreciation is a contra asset with a normal credit balance. It is decreased by $62,000 that increases the value of assets by $62,000. Therefore, the Accumulated depreciation-Equipment account is debited with $62,000.
• Equipment is an asset and is decreased by $62,000 due to disposal of equipment. Therefore, Equipment account is credited with $62,000.

To determine

To record: the journal entry for the depreciation expense for the equipment sold on June 30, 2017

Explanation of Solution

Record the journal entry for the depreciation expense for the equipment sold on June 30, 2017.

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
June  30,2017	Depreciation expense		6,000(1)
	Accumulated depreciation – Equipment			6,000
	(To record depreciation expenses.)

Table (2)

Working note:

Calculate the amount of depreciation.

Cost of the computer =$36,000

Useful life= 3 years

Number of months used in 2017 = 6 months (January 1, 2017-June 30, 2017)

$\begin{array}{c}\text{Annual depreciation =}\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of months used}}{12}\\ =\frac{\text{\$36,000}}{\text{3}}\times \frac{\text{6}}{12}\\ =\$6,000\end{array}$ (1)

Description:

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $6,000. Therefore, Depreciation expense – Equipment is debited with $6,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $6,000 that decreases the value of assets by $6,000. Therefore, the Accumulated depreciation-Equipment account is credited with $6,000.

To determine

To record: the journal entry for the disposal of plant assets on June 30, 2017

Explanation of Solution

Record the journal entry for the disposal of plant assets on June 30, 2017.

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
June 30, 2017	Cash		5,000
	Accumulated depreciation – Equipment		30,000 (2)
	Loss on disposal of plant assets		1,000 (3)
	Equipment			36,000
	(To record disposal of plant assets.)

Table (3)

Working notes:

Determine the amount of accumulated depreciation.

Cost of the computer =$36,000

Useful life= 3 years

Number of years used= 2 years (January 1, 2015-December 31, 2016)

Number of months used in 2017 = 6 months (January 1, 2017-June 30, 2017)

$\begin{array}{c}\text{ Depreciation cost }=\left[\begin{array}{c}\text{Cost}\times \frac{\text{Number of years used}}{\text{Useful life}}\\ +\text{Current year depreciation}\end{array}\right]\\ =\$36,000\times \frac{2}{3}+\$6,000\\ =\$30,000\end{array}$ (2)

Determine the amount of gain / (loss) on disposal of plant asset.

$\begin{array}{c}\text{ Gain/loss on disposal of asset = Sale proceeds}-\text{Book value}\\ \text{=Cash received}-\left(\begin{array}{l}\text{Equipment}-\\ \text{Accumulated depreciation}\end{array}\right)\\ =\$5,000-\left(\$36,000-\$30,000\right)\\ =\$5,000-\$6,000\\ =(\$1,000)\end{array}$ (3)

Description:

• Cash is an asset and increased by $5,000 due to sale of equipment. Therefore, Cash account is debited with $5,000.
• Accumulated depreciation-Equipment is a contra asset with a normal credit balance. It increases the value of the asset by $30,000. Therefore, Accumulated depreciation-Equipment account is debited with $30,000.
• Loss on disposal of Plant Assets decreases the revenue and thus stockholders’ equity is decreased by $1,000. Therefore, Loss on disposal of Plant Assets account is debited with $1,000.
• Equipment is asset and decreased by $36,000 due to sale of equipment. Therefore, Equipment account is credited with $36,000.

To determine

To record: the journal entry for the depreciation expense for the equipment sold on December 31, 2017

Explanation of Solution

Record the journal entry for the depreciation expense for the equipment sold on December 31, 2017.

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
December 31,2017	Depreciation expense		4,200 (4)
	Accumulated depreciation – Equipment			4,200
	(To record depreciation expenses)

Table (4)

Working note:

Compute the depreciation expense for the delivery truck.

Cost of the delivery truck =$25,000

Salvage value =$4,000

Estimated useful life =5 years

$\begin{array}{c}\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Salvage value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\$25,000-\$4,000}{\text{5Years}}\\ =\$4,200\end{array}$ (4)

Description:

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $4,200. Therefore, Depreciation expense – Equipment is debited with $4,200.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $4,200 that decreases the value of assets by $4,200. Therefore, the Accumulated depreciation-Equipment account is credited with $4,200.

To determine

To record: the journal entry for the disposal of plant assets on December 31, 2017

Explanation of Solution

Record the journal entry for the disposal of plant assets on December 31, 2017.

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Cash		9,000
	Accumulated depreciation – equipment		16,800 (5)
	Equipment			25,000
	Gain on disposal of plant asset			800 (6)
	(To record disposal of plant assets)

Table (5)

Working notes:

Determine the accumulated depreciation.

Cost of the delivery truck =$25,000

Useful life= 5 years

Number of years used= 4 years (January 1, 2014-December 31, 2017)

$\begin{array}{c}\text{Depreciation cost = }\left[\left(\text{Cost of the asset}-\text{Salvage value}\right)\times \frac{\text{Used period}}{\text{Useful life}}\right]\\ =\left(\$25,000-\$4,000\right)\times \frac{4}{5}\\ =\$16,800\end{array}$ (5)

Determine the amount of gain / (loss) on disposal of plant asset.

$\begin{array}{c}\text{ Gain/loss on disposal of asset = Sale proceeds}-\text{Book value}\\ \text{=Cash received}-\left(\begin{array}{l}\text{Equipment}-\\ \text{Accumulated depreciation}\end{array}\right)\\ =\$9,000-\left(\$25,000-\$16,800\right)\\ =\$9,000-\$8,200\\ =\$800\end{array}$ (6)

Description:

• Cash is an asset and increased by $9,000 due to sale of equipment. Therefore, Cash account is debited with $9,000.
• Accumulated depreciation-Equipment is a contra asset with a normal credit balance. It increases the value of the asset by $16,800. Therefore, Accumulated depreciation-Equipment account is debited with $16,800.
• Equipment is an asset and decreased due to sale of equipment by $25,000. Therefore, Equipment account is credited with $25,000.
• Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $800. Therefore, the gain on disposal of plant assets account is credited with $800.