Chapter 11, Problem 11.34E

1.

To determine

Depreciation:

Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

Straight-line method:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.

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

        

Sum-of- the-years’ digits method:

Sum-of-the years’ digits method determines the depreciation expense by multiplying the depreciable base and declining fraction.

Disposal of Assets:

Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

• Disposal with no gain no loss: When the asset is disposed with no consideration received.
• Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed for less than its book value.

To Prepare: The journal entry to record the sale.

Explanation of Solution

Prepare journal entry to record the sale.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		17,000
	Accumulated depreciation – L Machine		56,250
	Loss on sale			6,750
	L Machine			80,000
	(To record the sale of machine.)

Table (1)

• Cash is an asset and increased due to sale of asset. Therefore, debit Cash account with $17,000.
• Accumulated depreciation – L Machine is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation – L Machine with $56,250.
• Loss on sale of asset decreases the value of equity. Therefore, debit Loss on sale account with $6,750.
• L Machine is an asset and decreased to sale of asset. Therefore, credit L Machine with $80,000.

Working note:

1. Determine the amount of annual depreciation.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\\ =\frac{\$80,000-\$5,000}{5\text{years}}\\ =\$15,000\end{array}$

2. Determine the accumulated depreciation for five years.

Year	Depreciation for  partial years		Depreciation ($)
2012	$\text{\$15,000 x }\frac{\text{1}}{\text{2}}$	=	7,500
2013			15,000
2014			15,000
2015			15,000
2016	$\text{\$15,000 x }\frac{\text{1}}{\text{4}}$		3,750
Total			56,250

Table (2)

3.  Determine the loss on sale of asset.

$\begin{array}{c}\text{Loss on sale of asset = }\left[\begin{array}{l}\text{Purchase price }\\ \text{– Cash spent on sale}\\ \text{ – Accumulated depreciation }\end{array}\right]\\ =\$80,000-\$17,000-\$56,250\\ =\$6,750\end{array}$

2.

To determine

To Prepare: The journal entry to record the sale, assuming that the company used sum-of-the-years’-digits depreciation method.

Explanation of Solution

Prepare journal entry to record the sale using sum-of-the-years’-digits depreciation method.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		17,000
	Accumulated depreciation – L Machine		67,500
	Gain on sale			4,500
	L Machine			80,000
	(To record the sale of machine.)

Table (3)

• Cash is an asset and increased due to sale of asset. Therefore, debit Cash account with $17,000.
• Accumulated depreciation – L Machine is a contra asset. It increases the value of asset account. Therefore, debit Accumulated Depreciation – L Machine with $67,500
• Gain on sale of asset increases the value of equity. Therefore, credit Gain on sale account with $4,500.
• L Machine is an asset and decreased to sale of asset. Therefore, credit L Machine with $80,000. 

Working note:

1. Calculate sum-of-the-digits.

$\begin{array}{c}\text{Sum-of-the-digits = }\frac{\text{n}\times \left(\text{n}+1\right)}{2}\\ =\frac{5\times \left(5+1\right)}{2}\\ =\frac{5\times 6}{2}\\ =15\end{array}$

2. Determine the depreciable base.

$\begin{array}{c}\text{Depreciable base = Purchase price –Residual value }\\ \text{= \$80,000–\$5,000}\\ \text{=\$75,000}\end{array}$

3. Determine the accumulated depreciation.

Year	Depreciable Base  ($)		Depreciation rate per year		Number of months the asset is in service		Depreciation ($)
2012	75,000	$\times$	$\frac{5}{15}$	$\times$	$\frac{6}{12}$	=	12,500
2013	75,000	$\times$	$\frac{5}{15}$	$\times$	$\frac{6}{12}$	=	12,500
	75,000	$\times$	$\frac{4}{15}$	$\times$	$\frac{6}{12}$	=	10,000
2014	75,000	$\times$	$\frac{4}{15}$	$\times$	$\frac{6}{12}$	=	10,000
	75,000	$\times$	$\frac{3}{15}$	$\times$	$\frac{6}{12}$	=	7,500
2015	75,000	$\times$	$\frac{3}{15}$	$\times$	$\frac{6}{12}$	=	7,500
	75,000	$\times$	$\frac{2}{15}$	$\times$	$\frac{6}{12}$	=	5,000
2016	75,000	$\times$	$\frac{2}{15}$	$\times$	$\frac{3}{12}$	=	2,500
Total							67,500

Table (4)

4. Determine the gain on sale of asset.

$\begin{array}{c}\text{Gain on sale of asset = }\left[\begin{array}{l}\text{Purchase price }\\ \text{– Cash spent on sale}\\ \text{ – Accumulated depreciation }\end{array}\right]\\ =\$80,000-\$17,000-\$67,500\\ =\$4,500\end{array}$