Terra Corporation purchased equipment with a 10-year useful life and zero residu
ID: 2465206 • Letter: T
Question
Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the seventh year, the equipment is sold for $20,000. The entry to record this sale will include _______. Assume the straight-line depreciation method is used.
Select all that apply and click Submit
a debit to Cash for $20,000
a credit to Equipment for $30,000
a credit to Equipment for $100,000
a debit to Loss for $10,000
a credit to Gain for $20,000
a debit to Accumulated Depreciation for $10,000
a debit to Accumulated Depreciation for $70,000
Explanation / Answer
Solution:
Cost of Equipment
$100,000
Useful Life
10 years
Annual Depreciation [(Cost of Equipment – Salvage Value)/useful Life]
($100,000 – 0) / 10 = $10,000
Depreciation for 6 Years ($10,000 x 6)
$60,000
Book Value (Carrying Value) of Equipment at the end of 7th Year (Cost of Equipment – Depreciation for 6 years)
$100,000 - $60,000 = $40,000
Sale Value of Equipment
$20,000
Loss on Sale of Equipment = Book Value – Sale Value of Equipment = $40,000 - $20,000 = $20,000
Since, Sale Value of Equipment is less than Book Value at the end of 7th year, company should record a loss of sale of equipment of $20,000 and the following entry is to be passed
Debit
Credit
Cash A/c Dr.
$20,000
Loss on Sale of Equipment Dr.
$20,000
Accumulated Depreciation A/c Dr.
$60,000
To Equipment
$100,000
Hence the following items apply:
a. Debit to Cash (Sale Proceeds) $20,000
a. Credit to Equipment for $100,000 (Asset value from balance sheet should be removed)
a. Debit a loss for $20,000 (Loss to be recorded)
Cost of Equipment
$100,000
Useful Life
10 years
Annual Depreciation [(Cost of Equipment – Salvage Value)/useful Life]
($100,000 – 0) / 10 = $10,000
Depreciation for 6 Years ($10,000 x 6)
$60,000
Book Value (Carrying Value) of Equipment at the end of 7th Year (Cost of Equipment – Depreciation for 6 years)
$100,000 - $60,000 = $40,000
Sale Value of Equipment
$20,000
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