Prepare all journal entries needed on 9/30/2014 to record the disposal; Show your computations

Question

Parker Industries has a fiscal year end of 12/31 and uses the straight-line method of depreciation. On
Sept 30, 2014, the company sold old delivery equipment for $17,000. The delivery equipment was purchased on Jan 1, 2012, for $24,000 and was estimated to have a $4,000 salvage value at the end of its 5-year life.
Depreciation on the delivery equipment has been recorded once a year through Dec 31, 2013.

Instruction:
Prepare all journal entries needed on 9/30/2014 to record the disposal; Show your computations

Answer 1

The basic journal entry to record the sale of property, plant & equipment for cash is as follows:

 

Dr: Cash - to record proceeds received

Dr: Accumulated Depreciation - to remove depreciation accumulated to date

Cr: Equipment - to remove the equipment at cost

Dr/Cr: Loss/Gain on disposal - to record a loss/gain for the difference between the net book value of the equipment at the disposal date and the proceeds received

 

To determine the amount of depreciation accumulated to date, we must first determine the annual depreciation expense. Using the straight-line method, the computation is as follows:

 

(Cost - Salvage value) / Estimated use life in years.

 

Thus, the annual depreciation expense is: ($24,000 - $4,000) / 5 = $20,000 / 5 = $4,000.

 

In this case, because the sale was during the fiscal year at 9/30/2014 and depreciation was only recorded through 12/31/2013, we must first bring the depreciation up to date by increasing accumulated depreciation and recording the depreciation expense from 12/31/2013 to 9/30/2014, or 3/4 of a year. That amount would be the annual depreciation expense * 3/4, or $4,000 * 3/4 = $3,000. That entry would be:

 

9/30/2014

Dr: Depreciation expense $3,000

Cr: Accumulated depreciation $3,000

 

After that entry, the amount of accumulated depreciation at the sale date would be $4,000 for 2012 and $4,000 for 2013 and $3,000 for 3/4 of 2014, or $$11,000. Now we can complete the entry for the sale as follows:

 

9/30/214

Dr: Cash $17,000

Dr: Accumulated depreciation $11,000

Cr: Equipment $24,000

Cr: Gain on sale of equipment $4,000 (($24,000 - $11,000) - $17,000)

 

Hopefully that helps.