Question

Mercury Inc. purchased equipment in 2019 at a cost of $497,000. The equipment was expected to produce 580,000 units over the next five years and have a residual value of $33,000. The equipment was sold for $253,600 part way through 2021. Actual production in each year was: 2019 = 83,000 units; 2020 = 133,000 units; 2021 = 67,000 units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposal date.

Required:
1. Calculate the gain or loss on the sale.
2. Prepare the journal entry to record the sale.
3. Assuming that the equipment was instead sold for $280,000, calculate the gain or loss on the sale.
4. Prepare the journal entry to record the sale in requirement 3.

Answer 1

1) Accumulated depreciation = (497000-33000)/580000*283000 = 226400

Book value on the date of sale = 497000-226400 = 270600

Gain or (loss) = 253600-270600 = -17000

2) Journal entry

Date	account and explanation	Debit	Credit
2021	Cash	253600
	Accumulated depreciation-equipment	226400
	Loss on sale of equipment	17000
	Equipment		497000

3) Book value on date of sale = 270600

Gain (loss) = 280000-270600 = 9400

4) Journal entry

Date	account and explanation	Debit	Credit
2021	Cash	280000
	Accumulated depreciation-equipment	226400
	Gain on sale of equipment		9400
	Equipment		497000