Question

4. On January 1, 2010, Comfort Realty, purchased a limo at an acquisition cost of $28,000. The vehicle has been depreciated by the stright0line method using a 4-year service life and a $4,000 salvage value. The company’s fiscal year ends on December 31. prepare the journal entry or entries to record the disposal of the limousine assuming that it was: a. Retired and scrapped with no salvage value of January 1 2014 b. Sold for $5,000 on July 1, 2013 Action plan: at the time of disposal, determine the book value of the asset. Recognize any gain or loss from disposal of the asset. Remove the book value of assets from the records debiting accumulated depreciation for the total depreciation to the date of disposal and crediting the asset account for the cost of the asset

Answer 1

Annual depreciation = (Cost price - Salvage value)/Useful life

= (28,000 - 4,000)/4

= $6,000

a)

Accumulated depreciation till Jan. 1, 2014 = 6,000 x 4

= $24,000

Book value at the time of sale = Cost price - Accumulated depreciation

= 28,000 - 24,000

= $4,000

Loss on disposal = Book value at the time of sale - Sale price

= 4,000 - 0

= $4,000

Journal

Date	Account title	Debit	Credit
Jan. 1, 2014	Accumulated depreciation	24,000
	Income summary	4,000
	Limo		28,000

b)

Accumulated depreciation till July 1, 2013 = 6,000 x 3 + 3,000

= $21,000

Book value at the time of sale = Cost price - Accumulated depreciation

= 28,000 - 21,000

= $7,000

Loss on disposal = Book value at the time of sale - Sale price

= 7,000 - 5,000

= $2,000

Journal

Date	Account title	Debit	Credit
July 1, 2013	Cash	5,000
	Accumulated depreciation	21,000
	Income summary	2,000
	Limo		28,000