A company sells a piece of equipment half-way through the accounting period. The straight-line rate of depreciation on the equipment is $40,000 a year. Before recording the asset sale, the company should debit:
A) depreciation expense for $40,000 and credit long-lived assets for $40,000.
B) accumulated depreciation for $40,000 and credit cash for $40,000.
C) depreciation expense for $20,000 and credit accumulated depreciation for $20,000.
D) cash for $20,000 and credit depreciation expense for $20,000.

Question

Quizplus · Accepted Answer

Since the equipment was sold halfway through the accounting period, the company should only record depreciation expense for the period in which it owned the equipment. Therefore, the company should debit depreciation expense for half of the annual rate, which is $20,000, and credit accumulated depreciation for the same amount. This will bring the accumulated depreciation balance up to the value of the asset at the time of the sale, which is then credited to cash (or accounts receivable, depending on the terms of the sale). Option A would overstate depreciation expense for the period, option B would not reflect the fact that the asset was sold, and option D would not account for the portion of the year in which the company owned the asset.

A Company Sells a Piece of Equipment Half-Way Through the Accounting