Question

Abbott Landscaping purchased a tractor at a cost of $42,000 and sold it three years later for $21,600. Abbott recorded depreciation using the straight-line method, a five-year service life, and a $3,000 residual value. Tractors are included in the Equipment account.
1. Record the sale of equipment. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)
2. Assume the tractor was sold for $13,600 instead of $21,600. Record the sale of equipment. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Answer:

1.  Cash                                                               21600 Dr

    Provision for Depreciation- Equipment    23400 Dr

         Equipment Account                                       42000 Cr

         Gain on Disposal-Equipment                        3000 Cr

2. Cash                                                                 13600 Dr

    Provision for Depreciation- Equipment      23400 Dr

    Loss on Disposal-Equipment                        5000 Dr

            Equipment Account                                           42000 Cr

Explanation:

1. The depreciation is charged on tractor on a straight line basis for 5 year useful life estimation.

The yearly depreciation expense and transfer to provision for depreciation account is,

Depreciation-yearly =  (42000 - 3000) / 5 = 7800

The equipment is sold after 3 years thus provision of 3 years exists.

Total provision for dep after 3 years = 7800 * 3 = 23400

The NBV after 3 years = 42000 - 23400 = 18600

The gain on disposal = 21600 - 18600 = 3000

2. The selling price now is 13600 but other factors remain constant.

The loss on disposal = 13600 - 18600 = 5000