Marks Consulting purchased equipment costing $45,000 on January 1, Year 1. The equipment is estimated to have a salvage value of $5,000 and an estimated useful life of 8 years. Straight-line depreciation is used. If the equipment is sold on July 1, Year 5 for $20,000, the journal entry to record the sale will include a:

The journal entry to record the sale will be:

Debit Cash (sales proceed)                  $20,000

Debit Loss on disposal                           $2,500

Debit Accumulated depreciation         $22,500

Credit Equipment cost                          $45,000

(To record disposal of an equipment)

Explanation:

Straight-line depreciation method is allocating the cost of an asset on a uniform basis over its useful life. The formula for this method of depreciation is: (Cost - Salvage value) / Useful life

Depreciation = ($45,000 - $5,000) / 8 years

Depreciation = $5,000 yearly

On July 1, Year 5, acummulated depreciation will be 4.5 years x $5,000 = $22,500.

Net book value of the equipment on July 1, year 5, is $22,500 ($45,000 - $22,500). When compared with the sales proceed, loss on disposal will be $2,500 ($22,500 - $20,000). The required journals were as provided above.

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