Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31, for $20,000 cash. The following data were available at the time of sale: 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, for $20,000 cash. The following data were available at the time of sale:  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

When an asset is sold, the difference between its sale price and its carrying (book) value is recognized as a gain or loss. Carrying value is the net balance of the asset's account (Equipment) after reducing the value of its accumulated depreciation. In this case, the carrying value of the equipment can be calculated as follows:

Carrying value = Cost of equipment - Accumulated depreciation
Carrying value = $15,000 - $6,000 (assuming accumulated depreciation up to the end of the current year)
Carrying value = $9,000

Since the equipment was sold for $20,000, the gain on disposal is $20,000 - $9,000 = $11,000. Therefore, the entry to record the sale should include a credit of $20,000 to the Equipment account (to reduce its balance to zero), a debit of $9,000 to the Accumulated Depreciation account (to reduce its balance to $0), and a credit of $11,000 to the Gain on Disposal account. No loss is recognized in this case.

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