23 E - Horngren'S Financial And Managerial Accounting

Question

Recording partial-year depreciation and sale of an asset On January 2, 2016, Pet Spa purchased fixtures for \(37,800 cash, expecting the fixtures to remain in service for six years. Pet Spa has depreciated the fixtures on a straight-line basis, with \)9,000 residual value. On May 31, 2018, Pet Spa sold the fixtures for $24,200 cash. Record both depreciation expense for 2018 and sale of the fixtures on May 31, 2018

Step-by-Step Solution

Answer

Loss on sale of Equipment value is $2,000. 

Definition of Straight-Line Method

The method of calculating the depreciation under which each year of the useful life of the asset reports the same depreciation is known as the straight-line method. The depreciation method under this method is calculated using salvage value, cost, and useful life. 

Calculate the Depreciation by using Straight – Line method

Date	Accounts and Explanation	Debit $	Credit $
31 May 2018	Depreciation expenses	2,000
	Accumulated depreciation		2,000
31 May 2018	Cash	24,200
	Accumulated depreciation	11,600
	Loss on sale	2,000
	Furniture and Fixture		37,800
	(To record the sale of asset)

Working note:

Calculation of annual depreciation

$\begin{array}{c}Annual depreciation=\frac{Cost-Salvage value}{Estimated use fullife}\\ =\frac{\$37,800-\$9,000}{6}\\ =\$4,800\end{array}$ 

Depreciation from 1 Jan 2018 to 31 May 2018:

 $\begin{array}{c}Depreciation for 2018=Annual depreciation\times \frac{5}{12}\\ =\$4,800\times \frac{5}{12}\\ =\$2,000\end{array}$

 

Particulars	Amount	Amount
Cash received against sale		$ 24,200
Less: Book value of asset disposed of cost	$ 37,800
Less : Accumulated Depreciation	($ 11,600)	(26,200)
Loss		$2,000