Mercury Company reports depreciation expense of $40,000 for Year 2. Also, equipment costing $150,000 was sold for its book value in Year 2. There were no other equipment purchases or sales during the year. The following selected information is available for Mercury Company from its comparative balance sheet. Compute the cash received from the sale of the equipment. $$\begin{array} { | l | c | c | }
\hline \text { At December 31 } & \text { Year 2 } & \text { Year 1 } \
\hline \text { Equipment } & \$ 600,000 & \$ 750,000 \
\hline \text { Accumulated Depreciation-Equipment } & 428,000 & 500,000 \
\hline
\end{array}$$
A) $32,000.
B) $68,000.
C) $38,000.
D) $40,000.
E) $36,000.

Question

Mercury Company reports depreciation expense of $40,000 for Year 2. Also, equipment costing $150,000 was sold for its book value in Year 2. There were no other equipment purchases or sales during the year. The following selected information is available for Mercury Company from its comparative balance sheet. Compute the cash received from the sale of the equipment. $$\begin{array} { | l | c | c | } 
\hline \text { At December 31 } & \text { Year 2 } & \text { Year 1 } \
\hline \text { Equipment } & \$ 600,000 & \$ 750,000 \
\hline \text { Accumulated Depreciation-Equipment } & 428,000 & 500,000 \
\hline
\end{array}$$
A) $32,000.
B) $68,000.
C) $38,000.
D) $40,000.
E) $36,000.

Quizplus · Accepted Answer

The book value of the equipment sold can be calculated as follows:

Book value of equipment sold = Cost of equipment - Accumulated depreciation
Book value of equipment sold = $150,000 - $150,000 = $0

Since the equipment was sold for its book value, the cash received from the sale of the equipment is also $0. Therefore, the correct answer is C) $38,000. This is calculated as follows:

Depreciation expense for Year 2 = $40,000
Accumulated depreciation as of December 31, Year 2 = $428,000
Accumulated depreciation as of December 31, Year 1 = $500,000

Therefore, the depreciation for Year 2 reduced the accumulated depreciation by $72,000 ($500,000 - $428,000). This means that the cost of the equipment decreased by the same amount, from $750,000 to $678,000 ($750,000 - $72,000). Since the equipment was sold for its book value of $150,000, the cash received from the sale was $150,000 - $678,000 = -$528,000. However, since the company cannot receive a negative amount of cash, the actual cash received from the sale was $0.

Hence, the correct answer is C) $38,000.

Mercury Company Reports Depreciation Expense of $40,000 for Year 2