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Financial & Managerial Accounting
Found in: Page 387
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Question: Garcia Co. owns equipment that cost $76,800, with accumulated depreciation of $40,800. Garcia sells the equipment for cash. Record the sale of the equipment under the following three separate cases assuming Garcia sells the equipment for (1) $47,000 cash, (2) $36,000 cash, and (3) $31,000 cash

  1. If the equipment is sold for $47,000 cash, then there will be a profit of $11,000.
  2. If the equipment is sold for $36,000 cash, there will be no profit or gain.
  3. If the equipment is sold for $31,000 cash, then there will be a loss of $ 5,000.
See the step by step solution

Step by Step Solution

Step 1: Meaning of Depreciation

Depreciation is the overall reduction in the book value of the asset because of its regular use or wear and tear.

Step 2: (1) Sale for $47,000

Sale above book value: If Gracia Co. receives an amount above the equipment’s book value, a gain on disposal occurs. The entry is

Cash

$47,000

Accumulated depreciation

$40,800

Gain on Disposal of Equipment

$11,000

Equipment

$76,800

(Record sale of equipment for a $11,000 gain.)

Step 3: (2) Sale for $36,000

Sale at Book Value: If Garcia Co. receives an amount equal to the equipment’s book value, no gain or loss occurs on disposal. The entry is

Cash

$36,000

Accumulated depreciation

$40,800

Equipment

$76,800

(Record sale of equipment for no gain or loss.)

Step 4: (3) Sale for $31,000

Sale below Book Value: If Garcia Co. receives an amount below the equipment’s book value, a loss on disposal occurs. The entry is

Cash

$31,000

Loss on Disposal of Equipment

$5,000

Accumulated depreciation

$40,800

Equipment

$76,800

(Record sale of equipment for a loss of $5,000.)

Working note:

Calculation of book value

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