Foghorn Ltd. has an asset with an original cost of $16,000 and a carrying amount (net book value) today of $4,400. The Company no longer needs the asset and has decided to sell it today for $3,000 cash. The journal entry Foghorn will use to record the sale includes:
A) a debit to the asset account for $4,400.
B) a credit to cash account for $3,000.
C) a debit to accumulated amortization for $11,600.
D) a credit to the asset account for $4,400.

Question

Quizplus · Accepted Answer

When an asset is sold, the difference between the carrying amount and the sale price is recognized as a loss or gain on the sale. In this case, the carrying amount is $4,400 and the sale price is $3,000, resulting in a loss of $1,400. The journal entry to record the sale would be:

Debit Cash $3,000
Debit Accumulated Amortization $11,600
Credit Asset $16,000

The debit to accumulated amortization removes the entire accumulated amortization of $11,600 from the books, and the credit to the asset account removes the original cost of $16,000 from the books, leaving a loss of $1,400 on the income statement. The credit to cash is also recorded to reflect the cash inflow from the sale.