Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31,2012,for $20,000 cash.The following data were available at the time of sale: $\begin{array}{llcc}
\text { Acquisition cost } & \$ 100,000 \
\text {Accumulated depreciation on December 31, 2012, after adjustment } &85,000
\end{array}$

When this transaction is recorded,it should include a
A)debit of $80,000 to the Loss on Disposal account
B)credit of $20,000 to the Equipment account
C)credit of $5,000 to the Gain on Disposal account
D)debit of $20,000 to the Accumulated Depreciation account

Question

Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31,2012,for $20,000 cash.The following data were available at the time of sale: $\begin{array}{llcc}
  \text { Acquisition cost } & \$ 100,000 \
 \text {Accumulated depreciation on December 31, 2012, after adjustment } &85,000
\end{array}$
 
When this transaction is recorded,it should include a
A)debit of $80,000 to the Loss on Disposal account
B)credit of $20,000 to the Equipment account
C)credit of $5,000 to the Gain on Disposal account
D)debit of $20,000 to the Accumulated Depreciation account

Quizplus · Accepted Answer

The gain or loss on disposal of an asset is determined by comparing the cash received from the sale to the asset's book value. Book value is determined by subtracting the accumulated depreciation from the acquisition cost (or original cost) of the asset.

In this case, the book value of the equipment at the time of sale is:

Book value = Acquisition cost - Accumulated depreciation
Book value = $100,000 - $85,000
Book value = $15,000

Since the equipment was sold for $20,000 cash, there is a gain on disposal of $5,000. The journal entry to record the sale would be:

Debit Cash $20,000
Credit Equipment $100,000
Credit Accumulated Depreciation $85,000
Credit Gain on Disposal $5,000

Option C is the correct answer because it records the gain on disposal of $5,000 by crediting the Gain on Disposal account. Option A is incorrect because it records a loss on disposal of $80,000, which is not the case. Option B is incorrect because it records a credit to the Equipment account, which would increase its balance even though the equipment has been sold. Option D is incorrect because it records a debit to the Accumulated Depreciation account, which would increase its balance even though the equipment has been sold.

Equipment with an Estimated Residual Value at Acquisition of $15,000