Equipment acquired on January 8 at a cost of $168,000 has an estimated useful life of 18 years,

Equipment acquired on January 8 at a cost of $168,000 has an estimated useful life of 18 years, has an estimated residual value of $15,000, and is depreciated by the straight-line method.

a. What was the book value of the equipment at December 31 the end of the fourth year?

b. Assuming that the equipment was sold on April 1 of the fifth year for $125,000, journalize the entries to record (1) depreciation for the three months until the sale date and (2) the sale of the equipment.

Answer:

a. Cost of equipment.............................................................................. $168,000

Less accumulated depreciation at end of fourth year, December 31

(4 years at $8,500 per year)............................................................... 34,000

Book value at end of fourth year, December 31....................................... $134,000

Yearly depreciation = ($168,000 – $15,000) ÷ 18 = $8,500

b. Apr.  1 Depreciation Expense—Equipment 2,125

Accumulated Depreciation—Equipment 2,125

Equipment depreciation

($8,500 × 3 ÷ 12).

1 Cash125,000

Accumulated Depreciation—Equipment 36,125

Loss on Sale of Equipment 6,875

Equipment168,000

*Accumulated Depreciation—Equipment = $34,000 + $2,125 = $36,125

The balance in the equipment account is $3,150,000, and the balance in the accumulated depreciation—equipment account is $2,075,000.

The balance in the equipment account is $3,150,000, and the balance in the accumulated depreciation—equipment account is $2,075,000.

a. What is the book value of the equipment?

b.  Does the balance in the accumulated depreciation account mean that the equipment’s loss of value is $2,075,000? Explain.

Answers:

a. $1,075,000 ($3,150,000 – $2,075,000)

b. No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value.