Lighting Company sold an old machine on December 31, 2011, for $22,000 cash. The following data was available when the truck sold: $\begin{array}{ll}
\text { Acquisition cost } & \$ 100,000 \
\text { Estimated salvage value at time of acquisition } & 8,000 \
\text { Accumulated depreciation on December 31. 2011, after acliustment } & 85,000
\end{array}$ When this transaction is recorded, it should include:
A) debit of $7,000 to the loss on disposal account.
B) credit of $22,000 to the truck account.
C) credit of $7,000 to the gain on disposal account.
D) credit of $15,000 to the gain on disposal account.

Question

Quizplus · Accepted Answer

When selling a fixed asset, the difference between the sales price and the book value (cost minus accumulated depreciation) is recorded as a gain or loss on disposal. In this case, we don't have the book value, but we know the cash received for the sale ($22,000). Since the cash received exceeds the recorded cost of the truck (which we assume is less than $22,000), there is a gain on disposal. Therefore, we would credit the gain on disposal account for the amount of the gain ($7,000) and debit the truck account for the cost of the truck (unknown). Options A and D are incorrect because they suggest the amount of the gain or loss is different than what we know it to be ($7,000). Option B is incorrect because we should not credit the truck account when we're disposing of a truck.

Lighting Company Sold an Old Machine on December 31, 2011