PE 10-6B Sale of equipment

Equipment was acquired at the beginning of the year at a cost of $600,000. The equipment was depreciated using the double-declining-balance method based on an estimated useful life of 16 years and an estimated residual value of $60,000.

a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the second year for $480,000, determine the gain or loss on the sale of the equipment.
c. Journalize the entry to record the sale.


Answer:
a. $75,000 = $600,000 × [(1/16) × 2)] = $600,000 × 12.5%
b. $20,625 gain, computed as follows:


Cost……………………………………………………… $600,000
Less: First-year depreciation…………………… (75,000)
Second-year depreciation………………… (65,625) [($600,000 – $75,000) × 12.5%]
Book value at end of second year……………… $459,375
Gain on sale ($480,000 – $459,375) = $20,625
c.
 Cash 480,000
Accumulated Depreciation—Equipment 140,625
Equipment 600,000
Gain on Sale of Equipment 20,625